26 Apr Common Compliance Issues for Health Savings Account Participants
Original post ubabenefits.com
A health savings account, or HSA, is an attractive means of offsetting heath care costs. HSAs are tax-exempt trusts or custodial accounts established to pay medical expenses or reimburse incurred expenses. Contributions made to an HSA on behalf of an eligible individual can be made by an eligible individual, an employer, or a family member. HSA contributions made by an eligible individual or family member are deductible for the eligible individual and distributions to pay qualified medical expenses from an HSA are not taxed. Employer contributions to an HSA may be excluded from an employee’s gross income.
To enjoy tax-deductible or pre-tax HSA contribution benefits, participants must meet certain eligibility requirements. Overlooking the following will result in the taxpayer having to include in income all contributions made to the HSA, with the amount subject to a 10 percent additional excise tax.
An eligible individual will qualify for tax-exempt contributions if the individual:
- Is enrolled in a high deductible health plan (HDHP)
- Has no other health coverage under a plan which is not an HDHP (personally or through spouse coverage)
- Is not enrolled in Medicare
- Cannot be claimed as a dependent in the current tax year
- Is not participating in a medical flexible arrangement under a Code §125 plan unless the arrangement is a limited purpose flexible spending arrangement offering only vision, dental, or other non-health plan benefits
An individual is deemed as meeting these requirements even if the eligible individual’s spouse is enrolled in non-HDHP family coverage, as long as the spouse’s coverage does not cover the eligible individual. If each spouse in an eligible individual, each spouse wanting an HSA must open a separate HSA (as there is no “joint HSA”).
HDHPs have a higher annual deductible than typical health plans (with the exception of plans for preventive care benefits only). HDHPs also have a maximum limit on the amount of annual deductible and out-of-pocket medical expenses that must be paid for covered expenses (such as copays).
Two types of HDHP coverage can be provided to an eligible individual enrolled in an HSA: “self-only” or “family.” Self-only covers only an eligible individual. Family provides coverage to an eligible individual and at least one other individual. In order to be deemed an HDHP plan for 2016, an HDHP must have a minimum annual deductible of at least $1,300 for self-only coverage and at least $2,600 for family coverage, and the maximum annual deductible and out-of-pocket medical expenses must not exceed $6,550 for self-only coverage or $13,100 for family coverage.
If a family plan does not meet the HDHP rules for high deductible amounts, as long as the individual deductible is met for one family member, the higher annual deductible amount for the family does not need to be met. However, if neither the family nor individual family member deductible meets the minimum annual deductible for family coverage, the plan will not qualify as an HDHP and thus the individual will not be an eligible individual for purposes of attaining HSA qualified tax benefits.
HDHPs are subject to comparable contribution requirements, unless the participants make premium payments or contributions to the HDHP through a Code §125 plan. If contributions or premiums are made to the HDHP through an election under a Code §125 plan, the comparable contribution requirements do not apply, but the coverage and discrimination rules under Code §125 are applicable. Many employers disqualify their HDHPs because they do not know the rules applicable to contributions, coverage or discrimination.
Those employers who sponsor HDHPs and facilitate participant enrollment in HSAs should provide sufficient educational materials to participants to permit them to understand the basic eligibility requirements for HSA participation.