July 16, 2008
IRS Issues More Guidance on Health Savings Accounts
On June 25, 2008, the Internal Revenue Service (IRS) issued Notice 2008-59, guidance that includes 42 questions and answers on various topics concerning Health Savings Accounts (HSAs). This long-awaited "grab bag" of guidance includes information on several topics including eligibility, employer contributions and prohibited transactions. This is the third set of question and answer guidance IRS has issued since HSAs were created in 2003.1
Individuals are eligible to contribute to an HSA if they are covered by a high-deductible health plan (HDHP) and, with certain exceptions2, they are not covered by any other health plan. Individuals are not eligible to contribute if they are enrolled in Medicare or are claimed as a dependent on another person's tax return. Questions continue to arise in a variety of scenarios where it is not clear whether an individual is HSA eligible. The guidance addresses several areas including the following:
- Individuals still are HSA eligible if they have access to a clinic on the employer's premises where they receive either free health care or health care at charges below fair market value for health care services that are not "significant benefits in the nature of medical care." Examples of services deemed "not significant" include physicals, immunizations, allergy injections, the provision of aspirin and other nonprescription pain relievers and the treatment of injuries caused by work accidents.
- An individual with family HDHP coverage is still HSA eligible if dependents covered by the HDHP (but not the individual) have access to other health coverage that is not HDHP coverage.
- An individual is not HSA eligible if he or she has, in addition to HDHP coverage, coverage under a "mini-med" plan that includes coverage before the minimum HDHP deductible is satisfied for a fixed amount per physician office visit or per out-patient treatment at a hospital.
- An individual is still HSA-eligible if he or she is covered by a health reimbursement arrangement (HRA) that, in addition to paying for vision, dental and preventive care, also pays and reimburses premiums for coverage by an accident and health plan, including the HDHP.
High-Deductible Health Plan
In order to be an HDHP a plan must provide "significant benefits." A high-deductible plan that only provides benefits for hospitalization or in-patient care, with no payment for physician office visits, is not an HDHP.
The guidance also discusses several issues concerning contributions, including the following related to employer contributions:
- Employer contributions to employees' HSAs made between January 1 and the date for filing an employee's return (without extensions) can be allocated to the prior year. The employer must notify the HSA trustee or custodian and inform the employee when contributions relate to the prior year.
- Employers can recoup contributions made for an employee who was never HSA-eligible. Since the contribution was made in error, the employer can request that the financial institution return the amount. If the amount is not recovered by the end of the taxable year, the employer must include the amount as gross income and wages on the employee's form W-2.
- Where, due to an error, an employer contribution to an HSA exceeded the maximum annual contribution allowed by the HSA rules, the employer can recoup the excess amounts.
- Employers CANNOT recoup HSA contributions made after an employee ceases mid-year to be HSA eligible.
Other issues discussed include:
- Use of Debit Cards — An HSA may be administered through a debit card that restricts payments and reimbursements to health care, but HSA beneficiaries must also have other ways to access available funds (e.g., online transfers, check writing, withdrawals from ATMs). Employers must notify employees that other access to the funds (in addition to the debit card) is available.
- Prohibited Transactions — An HSA account beneficiary cannot (among other things) borrow funds from the HSA or pledge the HSA as security for a loan or line of credit. These are among the prohibited transactions under the Internal Revenue Code that will result in a disqualification of the account. Specifically, as of the first day of the taxable year of the prohibited transaction, the account is no longer an HSA, the assets are deemed distributed, and taxes are applied to the amounts in the account, including an additional 10% tax for distributions not used for qualified medical expenses. If an employer sponsoring the account is the party that engaged in a prohibited transaction, the employer is liable for the excise tax, not the account beneficiary.
- State Law — The guidance clarifies that an HSA is created through a written instrument governed under state law. State trust law determines when an HSA is established. The guidance indicates that most state trust laws require that the trust must be funded in order to be established.
Implications for Plan Sponsors
The information in this Notice contributes to the growing body of information concerning how the HSAs rules apply in various circumstances, and how these accounts should be administered. These clarifications may make plan sponsors more willing to offer these arrangements to employees. Plan sponsors should note that, according to the Department of Labor, HSAs generally will not be governed by ERISA where employer involvement with the HSA is limited.3 Plan sponsors should make sure that their activities concerning the HSAs are limited to the boundaries set out in the DOL guidance, otherwise ERISA obligations such as reporting, disclosure and fiduciary standards will apply.
This latest Q and A guidance also demonstrates the complexity of these arrangements, and the vast amount of knowledge that HSA account holders in particular will need to have before they participate in an HSA. Plan sponsors with HSAs will need to continue their efforts to educate participants on a variety of HSA issues.
Plan sponsors should also be aware of two other sets of recently issued IRS guidance on specific issues concerning HSAs. Notice 2008-52 provides technical details implementing an amendment made by Congress in 2006 to the HSA law allowing individuals who are HSA eligible on the first day of the last month of the taxable year to make the full contribution to the HSA for the year. Notice 2008-51 provides details concerning the ability of an individual to make a one-time tax-free distribution from an IRA or Roth IRA to his or her HSA. This new rollover ability was also added to the HSA law by the same amendment by Congress in 2006.4
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As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on HSAs. The Segal Company can be retained to work with plan sponsors and their attorneys to evaluate the impact of the decision and possible compliance responses.
- See Notice 2004-2 and Notice 2004-50. (Click on the following text to return to the Capital Checkup.)
- Exceptions include coverage for preventative care. (Click on the following text to return to the Capital Checkup.)
- In Field Assistance Bulletins (FAB) 2004-01 and 2006-02, the DOL sets out guidance on what types of activities employers may engage in relative to HSAs without the HSA being considered an ERISA plan. These are available at: http://www.dol.gov/ebsa/regs/fabmain.html. (Click on the following text to return to the Capital Checkup.)
- See the January 2007 Bulletin "HSA Expansions in the Tax Relief and Health Care Act of 2006." (Click on the following text to return to the Capital Checkup.)
Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.