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The Surprising Compliance Issues of High Deductible Health Plan/Health Savings Account Arrangements

Originally posted by ubabenefits.com.

As the Patient Protection and Affordable Care Act (ACA) comes into complete fruition, many employers are offering to employees High Deductible Health Plans (HDHPs) and facilitating the establishment and funding of Health Savings Accounts (HSAs). The HDHP design helps employers offer employees a plan that is “affordable” under the ACA. The HSA allows employees to save for current and future year medical expenses on a pre-tax basis and thus ameliorate the burden of higher annual deductibles.

While the HDHP and HSA design provides benefits to both employers and employees, the design is not without its compliance challenges. Many employers are surprised to discover, after they establish an HDHP and HSA plan design, that they have failed to take certain compliance requirements into account.

For example, in order to be eligible to contribute deductible or pre-tax contributions to an HSA, an employee must be enrolled in an HDHP and may not have any other health coverage under a plan which is not an HDHP. This means, first, that an employee may participate in an HDHP without having an HSA, but the employee may not contribute on a taxdeductible or pre-tax basis to an HSA without participating in an HDHP, to the exclusion of any other health plan

An employee who has family coverage under an HDHP and a spouse with family coverage under a non-HDHP is eligible to fund an HSA on a tax deductible or pre-tax basis, up to the family limit. The lowest annual deductible of the employee and spouse plans will also be attributed to both the employee and the spouse. The employee is not rendered ineligible to fund an HSA; however, no portion of the employee’s contribution may be allocated to the ineligible spouse.

Participation in a medical flexible spending arrangement under a Code § 125 plan will render an employee ineligible to fund an HSA on a tax-favored basis. However, an employee may participate in a limited purpose flexible spending arrangement—one that offers only vision, dental, or other non-health plan benefits—and maintain eligibility to fund an HSA.

Variations in HDHP designs also present surprising challenges. For example, under the Internal Revenue Code (“Code”) § 223, the tiers of EE+Child, EE+Spouse, and EE+ Family are all considered “employee plus family.” If differences in the annual deductible amounts exist among these tiers, the lowest annual deductible for, say EE+Child, must still be over the minimum annual deductible amount for EE+Family coverage in the applicable year

A compliance issue may arise due to the comparability rules associated with HDHP and HSA designs. Employer contributions to HSAs are governed by the comparability rules under Code § 4980G. The comparability rules require that if an employer chooses to make HSA contributions on behalf of an employee, the employer must make comparable contributions to HSAs of all comparable participating employees. Failure to make contributions according to the comparability requirements set forth under the Code will subject the employer to an excise tax equal to 35% of the aggregate amount contributed by the employer during the plan year

“Comparable contributions” for HSA purposes are those which are the same monetary amount or which are the same percentage of the annual deductible limit under the HDHP for comparable participating employees. “Comparable participating employees” are defined in the Code as all employees who are eligible individuals covered under the HDHP of the employer and having the same category of coverage. The Code sets out only two categories of coverage: self-only HDHP coverage and family HDHP coverage. However, if an employer provides different categories of family coverage based upon the number of individuals covered by the HDHP, the comparability rules may be applied separately to each family category. The HDHP family categories for purposes of the comparability analysis are self+one, self+two, and self+three or more.

Comparability issues may be avoided entirely by having employer contributions made to an HSA on a pre-tax basis through a Code § 125 plan. Under these circumstances, the comparability rules do not apply and the employer’s contribution is subject to the coverage and non-discrimination rules applicable to Code § 125 plans.

The ACA has raised new interest among employers in HDHPs. Employers are advised, however, to seek counsel regarding their HDHP and HSA arrangements and to carefully educate employees regarding the requirements for eligibility to fund an HSA on a tax-favored basis.