Health Savings Accounts- HDHPs (Part 1)

Health Savings Accounts- HDHPs (Part 1)

by Clarke & Company Benefits Posted on: September 15, 2014Categories: HR & Compliance   

Health savings accounts (HSAs) are a popular type of tax-advantaged medical savings account available to individuals who are enrolled in high deductible health plans (HDHPs). Individuals can use their HSAs to pay for expenses that are covered under the HDHP until their deductible has been met, or they can use their HSAs to pay for qualified medical expenses that are not covered under the HDHP, such as dental or vision expenses.

Due to an HSA’s potential tax savings, federal tax law imposes strict eligibility requirements for HSA contributions. Among other eligibility requirements, an individual must be covered under an HDHP for the months for which contributions are made to his or her HSA.

This Legislative Brief summarizes the requirements that must be met for a health plan to qualify as an HDHP.

OVERVIEW OF ELIGIBILITY RULES

An individual’s eligibility for HSA contributions is generally determined monthly, as of the first day of the month. The HSA contribution limit is calculated each month, and a contribution can only be made for months in which the individual meets all of the HSA eligibility requirements.

To be HSA-eligible for a month, an individual must:

• Be covered by an HDHP on the first day of the month;
• Not be covered by other health coverage that is not an HDHP (with certain exceptions);
• Not be enrolled in Medicare; and
• Not be eligible to be claimed as a dependent on another person’s tax return.

The full-contribution rule that applies to individuals who are HSA-eligible on Dec. 1 is an exception to this general rule. Under this exception, an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions if he or she becomes covered under an HDHP in a month other than January and is HSA-eligible on Dec. 1 of that year. An individual who relies on this special rule must generally remain HSA-eligible during a 13-month testing period, with exceptions for death and disability.

HDHP COVERAGE REQUIREMENT

To be eligible for HSA contributions for a month, an individual must be covered under an HDHP as of the first day of the month and have no other impermissible coverage.

Example—HDHP Coverage Begins Mid-month: An employee begins HDHP coverage on the first day of a pay period, which is Oct. 15, 2014, and continues to be covered by the HDHP for the rest of 2014. For purposes of HSA contributions, the employee becomes eligible on Nov. 1, 2014.

 

An HDHP is a health plan that provides “significant benefits” and satisfies requirements for minimum deductibles and out-of-pocket maximums. An HDHP can be insured or self-funded. Also, the HDHP coverage can be self-only coverage or family coverage. For this purpose, family coverage means any coverage other than self-only coverage.

With the exception of preventive care benefits, no benefits can be paid by an HDHP until the minimum annual deductible has been satisfied.

SIGNIFICANT BENEFITS

An HDHP must provide “significant benefits,” although it may be designed with reasonable restrictions limiting the plan’s covered benefits. The restrictions will be reasonable only if other significant benefits remain under the plan in addition to the benefits subject to the restrictions. For example, a plan that restricts benefits to expenses for hospitalization or in-patient care, and excludes out-patient services, is not an HDHP because it does not provide other significant benefits in addition to the benefits subject to the exclusion.

A plan will not qualify as an HDHP if substantially all of its coverage is either “permitted insurance” or “permitted coverage” (for example, coverage for accidents, disability, dental care or vision care). Also, if substantially all the coverage that is intended to be an HDHP is provided through a health flexible spending account (FSA) or health reimbursement arrangement (HRA), the health plan is generally not an HDHP.

COST- SHARING LIMITS

The 2014 minimum annual deductible and maximum out-of-pocket requirements for HDHPs are as follows:

High Deductible Health Plan (HDHP)
Type of Coverage	Minimum Annual Deductible	Annual Out-of-pocket Maximum
Self-only	$1,250 ($1,300 for 2015)	$6,350 ($6,450 for 2015)
Family	$2,500 ($2,600 for 2015)	$12,700 ($12,900 for 2015)

 

The minimum annual deductibles and the maximum out-of-pocket expense limits for HDHP coverage are adjusted for increases in the cost of living. By June 1 of each calendar year, the IRS publishes the cost-of-living adjustments that will become effective as of the next Jan. 1. For HDHPs with non-calendar plan years, IRS Notice 2004-50 clarifies that the adjusted limits for the calendar year in which the HDHP’s plan year begins can be applied for that entire plan year.

Example—Non-calendar Year Plans: An individual obtains self-only coverage under an HDHP on June 1, 2014, the first day of the plan year, with an annual deductible of $1,250. The cost-of-living adjustments require the minimum deductible amount to be increased from $1,250 for 2014 to $1,300 for 2015. The plan’s deductible is not increased to comply with the increased minimum deductible amount until the plan’s renewal date of June 1, 2015. The plan satisfies the requirements for an HDHP with respect to deductibles through May 30, 2015.

 

 Look out for Part 2 on Tuesday’s Blog!