Health savings accounts (HSAs) have traditionally been known as tax-advantaged vehicles that also come with strict rules regarding how contribution funds are spent. There has been a recent escalation in the popularity of HSAs, and with it the tide is turning at the administrative and legislative levels. A recent blog post written by Randy Pete, the Director of the Center for Consumer Information and Insurance Oversight at the Centers for Medicare & Medicaid Services has even championed the use of HSA-eligible HDHPs offered through federally-facilitated exchanges. At the employer level, however, there continues to be legislative movement, and many of the proposed HSA rule amendments stand to benefit employers offering self-funded health plans as well as their employees.
To qualify for an HSA, the Internal Revenue Service (IRS) requires that eligible individuals are covered under a high deductible health plan (HDHP); have no “other” health coverage with the exception of the HDHP; have no other liabilities, specific disease or illness, or fixed hospital stays; are not enrolled in Medicare; and are not claimed as a dependent on someone else’s tax return. The expenses must also be deemed to be “qualified medical expenses”. There are parameters around employer contributions that must be followed as well. In addition to having an HDHP, employees must reduce the amount they contribute to their HSA by the amount of any contributions made by their employer that are also excludable from the employee’s income. Any contributions above the allowed HSA contribution limit are considered “excess contributions” that are not deductible for employees and also require employees to pay a 6% excise tax for each tax year that the excess contribution remains in the account. Moreover, the employer’s failure to comply with these regulations will result in the employer potentially being liable for excise taxes equal to 35 % of the aggregate amount it had contributed to their employees’ HSAs.
Accounting for these HSA contribution limits, or complying with first-dollar coverage rules in conjunction with HDHPs, can prove to be burdensome for even well-intentioned employers and employees. In addition, there are other obstacles to account for, such as the intersection of HSAs with Direct Primary Care (DPC), health flexible spending accounts (FSAs) and/or health reimbursement arrangements (HRAs).
With that said, there have been two separate proposed bills—H.R. 6311 and H.R. 6199—that are aimed at expanding the use of HSAs and freeing up some of the rigidity typically associated with HSA contributions. H.R. 6311 and H.R. 6199 each passed the House of Representatives on July 25, 2018 and both are current with the Senate. This article will highlight some of the proposed changes within these acts and the potential impact they would have on employers.
On May 10, 2018, the IRS issued HSA contribution and out-of-pocket limits for 2019 through Revenue Procedure 2018-30. It provided that self-only contribution limits would be $3,500 and family limits would be $7,000 in 2019, with self-only out-of-pocket maximums at $6,750 and family out-of-pocket maximums at $13,500. H.R. 6311 would amend the contribution limits to match the out-of-pocket maximums, raising the contribution limits to $6,650 for individuals and $13,300 for families. If passed, this change would nearly double the original limits and be a boon to employers and employees, as there would now be more flexibility in how employers incentivize employees (while accounting for comparability rules if there is no Section 125 Cafeteria Plan involved) with higher HSA contributions. As discussed above, the ramifications for excess contributions are quite high for employers and their employees. Under these proposed bills, there would be less risk of excess contributions, which would be good news for employees whose potential liability for excise taxes would be 6 % each year, and good news for employers whose potential liability for excise taxes would equal 35 % of the aggregate amount.
Employers often struggle with the notion that they can only provide first-dollar coverage to a HSA-HDHP, or provide coverage prior to the deductible being met, for preventive care or it would disqualify the HSA-HDHP. According to IRS rules, an HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible, without any adverse effects on an employee’s ability to contribute to an HSA. However, we have seen first-hand in our work at the Phia Group how determining what is “preventive” is not always a straightforward proposition. For instance, determining whether diabetic supplies, such as test strips, monitors, etc., are considered to be preventive is typically a fact-dependent situation based on use and intent in which there is often no black-and-white answer. As the rules are currently constituted, there is little room for error in an employer approximating preventive versus non-preventive treatment or supplies and determining whether it can provide first-dollar coverage.
Under the proposed changes in H.R. 6199, there would be greater first-dollar coverage flexibility for HDHPs. Health plans would have the opportunity to provide coverage for services prior to the deductible being met, up to $250 per year for individuals and $500 per year for family. This amended rule would provide leeway to employers that, as described above, may not necessarily be clear whether services or supplies covered under their plans are truly preventive. The stakes are high when it comes to first-dollar coverage since employees could potentially lose access to their HSA if the rules are not followed, as the IRS is serious about enforcement. Thus, employers would certainly welcome the dissolution of the existing zero-tolerance policy when it comes to first-dollar coverage for HSA-HDHPs.
Direct Primary Care (DPC)
Another potential game-changer for employers would be H.R. 6199’s proposed treatment of DPC service arrangements. Currently, under IRC Section 223(c), the IRS will not allow individuals covered under an HDHP to also be offered a DPC outside of the employer’s self-funded health plan. The IRS considers DPCs to be health plans under IRC Section 223(c), so if an employee uses their HSA for items related to DPCs, the IRS would consider this impermissible “other” coverage and would be a non-compliant use of HSA funds. H.R. 6199 would amend IRC Section 223(c) so that a DPC service arrangement would not be treated as “other” coverage that would result in disqualification an individual from contributing to an HSA. A DPC arrangement would be one in which individuals are provided primary care services by primary care practitioners and the sole compensation for such care is a fixed periodic fee of not more than $150 monthly for individuals and $300 monthly for a family. The reason this proposed legislation is significant for employers and those in the self-funded industry is that many employers are exploring the possibilities around DPCs, but do not want these arrangements to interfere with their employees’ HSAs because of the current rules around HSA-qualified HDHPs and DPCs.
HSA Interaction with FSAs and HRAs
Traditionally, an employee covered by an HDHP as well as a FSA or HRA that pays or reimburses qualified medical expenses, generally cannot also make contributions to an HSA. However, H.R. 619 would amend IRC Section 106(e)(2) so that employees with an FSA or HRA enrolling in a qualifying HDHP with an HSA would be permitted to transfer balances from their FSA or HRA to the HSA. Transfers would be capped at the IRS contribution limit for FSAs of $2,650 for individuals and $5,300 for families. Similar to the above, this extended room for transfers of money from FSAs and HRAs would be advantageous to employers and employees looking to avoid red tape around such transactions.
While it remains to be seen how this legislation will progress through Congress, employers should keep a watchful eye on the success of each bill, as they would receive valuable flexibility from the aforementioned changes to HSA regulations.