Health Savings Accounts- HDHPs (Part 2)

Health Savings Accounts- HDHPs (Part 2)

by Clarke & Company Benefits Posted on: September 16, 2014Categories: HR & Compliance   

This is a continued overview of eligibility rules fora health plan to qualify as a high deductible health plan (HDHP).

Minimum Annual Deductible

An HDHP must have a minimum annual deductible of $1,250 for self-only coverage ($1,300 for 2015) and $2,500 for family coverage ($2,600 for 2015). Except for preventive care benefits, an HDHP cannot pay benefits for covered services until the minimum annual deductible has been satisfied.

 

Family Coverage – Embedded Deductibles

When an individual has family coverage under an HDHP, no benefits can be paid under the HDHP (except for preventive care) until the minimum annual deductible for family coverage has been met. Some health plans administer family coverage in a way that includes an “embedded deductible.” A plan that has an embedded deductible pays claims for a specific individual if he or she has met the individual deductible, even if the family as a whole has not met the family deductible.

Example—Embedded Deductible:     Susan elected family coverage under a health plan for 2014. The plan year begins on Jan. 1 and includes a $1,250 individual deductible and a $2,500 family deductible. Susan incurs $2,000 in medical expenses on Jan. 15. Since the plan has an embedded deductible, Susan is required to pay $1,250 and the plan pays the remaining $750. Although the family deductible was not met, the plan will pay claims for Susan after she has met the individual deductible. Under the IRS rules, this plan does not qualify as an HDHP since claims were paid before the $2,500 HSA-required family deductible was met.Example—Embedded Deductible: Susan elected family coverage under a health plan for 2014. The plan year begins on Jan. 1 and includes a $2,500 individual deductible and a $5,200 family deductible. Susan incurs $3,000 in medical expenses on Jan. 15. Since the plan has an embedded deductible, Susan is required to pay $2,500 and the plan pays the remaining $500. Although the plan’s family deductible was not met, the plan will pay claims for Susan after she has met the individual deductible. In this example, the plan complies with the IRS rules and qualifies as an HDHP. The plan includes an embedded deductible, but its minimum individual deductible is equal to the minimum HSA-required family deductible.

 

An HDHP is not required to include, or prohibited from including, an embedded deductible. However, a health plan does not qualify as an HDHP if there is an embedded deductible that is lower than the required minimum annual deductible for family coverage. Also, the HDHP must be designed to ensure that the embedded individual deductibles do not cause the plan to exceed the out-of-pocket maximum expense limit for family coverage.

 

Deductible Carry-overs

Some health plans have a deductible carryover feature that allows expenses that are incurred below a participant’s deductible during the last three months of a plan year to be applied to the participant’s deductible in the following plan year.

IRS Notice 2004-50 provides that a deductible carryover feature will not prevent a plan from being an HDHP if the required minimum annual deductible for the health plan is proportionately increased to account for the fact that expenses incurred over more than 12 months may be used to satisfy the plan’s deductible.

To calculate the adjustment, a health plan must:

• Multiply the applicable required minimum annual deductible for self-only or family HDHP coverage by the number of months allowed in which to satisfy the deductible, and then
• Divide the resulting amount by 12.

The result of this is the adjusted required minimum annual deductible.

To qualify as an HDHP, the annual deductible under a health plan with a carryover feature must be equal to, or greater than, the adjusted required minimum annual deductible. Also, the adjusted required minimum annual deductible cannot exceed the applicable (self-only or family) maximum out-of-pocket expense limit.

 

Discounted Prices

An HDHP may negotiate discounted prices for health care services from providers. A health plan will not fail to qualify as an HDHP if covered individuals, including those who have not satisfied the plan’s deductible, receive health care services at discounted prices.

 

Prior Plan Coverage

If an employer changes health plans mid-year and the period during which expenses are incurred for purposes of satisfying the deductible is 12 months or less, IRS Notice 2004-50 confirms that the new health plan does not fail to qualify as an HDHP merely because it provides a credit toward the deductible for expenses incurred and not reimbursed during the previous health plan’s short plan year. It does not matter whether the prior plan was an HDHP.

Example—Prior Plan Coverage: An employer with a calendar year health plan switches from a non-HDHP plan to a new plan. Coverage under the new plan begins on July 1. The annual deductible under the new plan satisfies the minimum annual deductible for an HDHP and counts expenses incurred under the prior plan during the first six months of the year in determining if the new plan’s annual deductible is satisfied. The new plan satisfies the HDHP deductible limit.

 

In addition, if an individual changes coverage during the plan year from self-only HDHP coverage to family HDHP coverage, the family HDHP can take into account the expenses incurred by the individual during the portion of the plan year in which the individual had self-only coverage. This will not affect the plan’s HDHP status.

Read Part 1 Here. Look out for Part 3 this Thursday!