Employers offering a High Deductible Health Plan (HDHP) along with a Health Savings Account (HSA) need to be aware of the strict rules related to HSA eligibility and how their other health benefit plans might fit with these rules. Many employers already have a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA) benefit in place and may want to continue to offer that benefit for employees who do not choose the HDHP/HSA option. You can have both, but need to carefully craft your plan design and consider timing issues to remain in compliance with IRS regulations.
While reviewing this information, keep in mind that all of these eligibility restrictions relate only to the ability to make or receive contributions to a HSA. There are no limitations related to what types of benefits you can have in conjunction with a FSA or HRA.
The key issues to consider:
• Participation in an HSA is strictly limited to individuals who are:
1) participating in a statutorily defined high deductible health plan (HDHP) and
2) not covered under any other health plan that provides the same benefits as the HDHP. An individual who is covered under a general – purpose health FSA or HRA is not eligible to make contributions to a HSA. This applies to any health coverage that they may have through their spouse, so employers may wish to consider advising employees that they will not be HSA eligible if their expenses can be covered under a spouse’s FSA or other non HDHP coverage.
• The individual may, however, be covered by “permitted” insurance or coverage in addition to the HDHP, including a “limited” health FSA or HRA without losing HSA eligibility. The limited FSA or HRA must be carefully crafted and documented to define reimbursable expenses as only those allowed under IRC 223 (generally only dental, vision, preventative care or coverage for medical expenses that exceed the insurance deductible).
• If the individual is a participant in an FSA, they will not be eligible for HSA contributions until the end of the Plan Year for the FSA, even if the health FSA balance has been exhausted. IRS guidance 2005-38 confirmed again that the introduction of a new benefit such as an HSA is not a qualified change of status that allows a change in the health FSA election, so they cannot choose to drop their FSA coverage. Unless the employer terminates the FSA plan altogether or converts the entire health FSA to a “limited” HSA-compatible FSA upon midyear introduction of an HSA, employees participating in the FSA will be ineligible for the HSA until the end of the Plan Year. Furthermore, such a conversion to a Limited FSA must apply to all Health FSA participants, not just the ones who wish to convert in order to be eligible for HSA contributions.
Options for Adding a HDHP/HSA Benefit Midyear
Employer plans to add a HDHP/HSA benefit as an option during open enrollment for the insurance plans midyear. Employer will also continue to offer the traditional plan. If an employee is currently participating in the health FSA, that coverage would disqualify him from establishing a HSA. He could still elect the HDHP coverage for a lower premium, but could not contribute or receive employer contributions to the HSA until the end of the FSA plan year.
There are creative solutions to these eligibility problems – you just have to plan ahead. Here are just some of the plan design suggestions and solutions that we have advised to our clients to turn their problems into solutions:
• For the remainder of the first year only, substitute employer HSA contributions for the ineligible employees with some other reimbursement benefit. Then once the FSA plan year has ended, contributions can begin for the individuals who were not previously eligible for the HSA.
• Finish the current FSA plan year. Then, going forward, change the FSA plan year to match the insurance enrollment anniversary date to eliminate election lock for ensuing years. If open enrollment for insured coverage, HSA coverage and FSA coverage are all at the same time, employees can coordinate their benefits, maximize their options and no one is hindered by what type of coverage they have.
• HSA contributions can come from employers, eligible individuals or both. HSAs may be offered under an employer’s Section 125 flex plan, thereby allowing employees to contribute to an HSA with pre-tax salary reductions. If an employer is allowing employees to contribute to their HSA account through pre-tax deductions from payroll, then such an arrangement must be properly documented within their Section 125 plan. Failure to do so means noncompliance in both the Section 223 HSA plan and the Section 125 plan. The bottom line is that both of these arrangements are perfectly acceptable, but they need to be set up and documented properly.
NEO has extensive experience working with HSA plan design and consulting. We have a great deal to offer in the area of providing business with health benefit plan solutions that meet their unique needs, including consulting and design expertise as well as our comprehensive administration services.