Top 10 Ways to Avoid HSA Headaches When Implementing HSAs

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Every year, more employers are adding high deductible health plans (HDHP) along with Health Savings Accounts (HSA) to their benefit offerings to help curb the rising cost of health premiums, as well as help employees become better stewards of their health care dollars.

If you are considering implementing a HSA for the upcoming 2020 open enrollment season, you should carefully review the details of your existing plan(s). This will allow you to identify any issues and make any required modifications in advance to preserve the HSA eligibility of your employees.

To ensure a successful HSA implementation, examine the following key concepts:

1.      Do you have the required health plan?

To be HSA compatible, the required minimum health plan deductibles for 2020 are $1,400 Single or $2,800 Family and maximum out of pocket limits are $6,900 Single or $13,800 Family. Note: the maximum out of pocket limits are lower than the maximum established under ACA. There can be no copays for prescriptions or office visits until after the minimum health plan deductible has been met. However,first dollar coverage is permitted for preventive care, dental, or vision expenses.

It is important to note that the family deductible limit above must be able to be met by one person within the family coverage. This is referred to as either an “aggregate” or “non-embedded” deductible. If your plan has an “embedded” deductible the amount met by one person must be at least $2,800.

Examples:

Single Coverage Deductible

Family Coverage Deductible

Does Deductible meet HSA-Compatible Requirements?

$1,400

$1,400 per person,

up to $2,800 per family (embedded)

NO!

$2,800

$2,800 per person,

up to $5,600 per family (embedded)

Yes

$1,400

$2,800 per family

(aggregate: deductible could be met by one family member or a combination of family members)

Yes


2.      Do you have any disqualifying coverage?

The following are considered disqualifying coverage (not an all-inclusive list):

  • A Health Reimbursement Arrangement (HRA) that reimburses medical expenses before the minimum HDHP deductible.
  • A standard Health Care Flexible Spending Account (FSA). This could include an employee’s coverage through the employer plan, as well as an employee’s coverage through a spouse’s or parent’s plan.
  • Medicare.

These are all examples of disqualifying coverage that will make an individual ineligible for an HSA. Employees with disqualifying coverage would still be eligible for the underlying HDHP, they simply would not be able to make contributions to an HSA.

3.      If I have disqualifying coverage, will I be eligible for the employer contribution to the HSA?

No, you will not be eligible to establish an HSA and receive employer contributions if you have disqualifying coverage. If you have an HSA from a previous point in time, you are still not eligible to receive employer contributions to that account. You are able to continue utilizing funds from a pre-established HSA, but you cannot contribute new funds to the account.

4.      Do you have an HRA and is it HSA-compatible?

HRAs that reimburse only for dental and/or vision expenses are HSA-compatible. In addition, HRAs that do not reimburse until after the minimum required HDHP deductible (For 2020: $1,400 Single and $2,800 Family) has been satisfied are compatible with an HSA. An employee can contribute to an HSA and be eligible to receive reimbursement from the HSA-compatible HRA at the same time. This is a great way to stretch the tax savings. (Note: the same rules regarding aggregate vs. embedded deductibles apply, see question #1 above.)

5.      Do you have an HSA compatible Health Care FSA in your cafeteria plan?

Limited health FSAs are compatible with HSAs, because reimbursement is restricted to dental and vision expenses. An employee can participate in both the limited health FSA and contribute to the HSA at the same time. If you do not currently offer a limited health FSA, a plan amendment may be required to add this type of FSA to your cafeteria plan.

6.      Do you have a grace period in your cafeteria plan? 

Does your Health Care FSA have a 2 ½ month grace period? If your plan includes a grace period, any employees who have a balance in a standard health FSA on the last day of the prior plan year will not be able to immediately contribute to an HSA. This is regardless of when the employee actually exhausts the balance from the prior plan year or when the expenses are actually incurred.

If an employee has a balance on the last day of the plan year, the earliest they will be eligible to establish and make contributions to an HSA is the first day of the month following the end of the grace period.

7.      Do you have a Health Care FSA rollover in your cafeteria plan?

Does your Health Care FSA have rollover? Generally, if the employee has a balance in a standard health FSA at the end of the prior plan year, the FSA rollover will disqualify the employee from HSA eligibility for the entire next plan year, regardless of when the employee exhausts the rollover balance. Note: If the employee exhausts the potential rollover balance during the runout period, with claims only from the prior plan year, the HSA eligibility will only be delayed until the first of the month following the run out period.

8.      When you have Health Care FSA rollover, are there plan designs that would help avoid full year disqualification?

Yes! Changes in plan design may enable some or all of your employees to make HSA contributions sooner. Consult with a trusted advisor and/or Third Party Administrator to discuss possible plan design options. For example, minimum rollover amounts or a required enrollment in the next plan year to receive rollover. If you’re an Employee Benefits Corporation client, talk to your Client Services Consultant about “Auto-Convert”, a plan design option to help ensure as many employees remain HSA eligible as possible from one year to the next.

9.      Will the employer and/or employee make contributions to the HSA?

Employees and employers can fund HSAs pre-tax ONLY IF done through the cafeteria plan and if the plan document permits. Note: A plan amendment may be required. Employer contributions to the HSA made through the cafeteria plan will avoid the HSA comparability rules which will give employers more options for contribution strategies. All HSA contributions made through the cafeteria plan are pre-tax at the point of payroll deduction, which will give employees a tax break sooner than if they contributed pre-tax and received the tax benefit while filing their year-end taxes.

Note: HSA contributions made through the cafeteria plan will avoid the comparability rules, but will be subject to nondiscrimination testing.

10.     Does your cafeteria plan year renew at the same time as your health insurance plan? Timing is everything!

If your cafeteria plan and health insurance plan do not renew at the same time, you may want to consider aligning the renewal dates of your medical plan and your Health Care FSA prior to moving to the HDHP. Timing is everything! Making health plan changes to add an HDHP plan with an HSA mid-cafeteria plan year will not constitute a reason to modify Health Care FSA elections mid-plan year (including changing a standard health FSA to a limited health FSA). Therefore, employees with the FSA would not be eligible to contribute to the HSA immediately. You can run a short cafeteria plan year in order to get in sync with the health plan renewal. That way, employers can make any required plan amendments and employees can make informed decisions about FSAs that will preserve HSA eligibility.

The Bottom Line:

Health Savings Accounts (HSA) headaches can be avoided with proper planning and an understanding of the various IRS rules. Make sure your employee benefit plans are set up in a way that will help employees’ maintain their HSA eligibility and at the same time gain the greatest tax advantages.

Categories: Benefits in General, Compliance, Health Care in General | Tags: HSA , Health Savings Account , HDHP , High Deductible Health Plan , HSA Compatible , Disqualifying Coverage , Limited Health FSA , HRA , Cafeteria Plans , Grace Period , Rollover , Embedded , Aggregate | Return