7 trickiest health savings account questions answered

August 1, 2008 by Jennifer Azara

Posted in: Cost cutters, Healthcare, IRS, Special Report

Have questions about health savings accounts? IRS just gave answers to 42 of them. Is yours on the list?

It’s been four years since the feds gave their stamp of approval to health savings accounts (HSAs), but now companies and their employees are finally warming to the concept.

Maybe that’s why IRS thought it was a good time to put out some answers to the most common questions swirling around the subject (there’s no shortage of them).

IRS Notice 2008-59 covers everything from:

Who’s eligible to participate
How to handle high-deductible plans
How to make distributions
Which transactions are prohibited
How to establish an HSA, and
How to administer a program.

There’s too much in it to cover the Service’s position on every issue. But here are a handful of the most critical questions, complete with IRS’ answers.

Question #1: “I have an employee who’s also covered by a health reimbursement account (HRA) that pays and reimburses for vision, dental and preventative care expenses, plus premiums for accident and health plan coverage. Is he or she ineligible for an HSA?”

IRS’s answer: No. Just because an employee participates in an HRA doesn’t mean he or she can’t participate in an HSA. If you limit the HRA’s benefits to cover vision, dental, preventative care and the employee’s share of the high deductible health plan (HDHP), you’re golden.

Question #2: “What if an employee is covered by another plan that pays for medical expenses before the minimum HDHP deductible is reached, like a mini-med plan? Is that person eligible to be in an HSA?”

IRS’s answer: No. A person with a mini-med (or similar) plan in place cannot contribute to an HSA.

Question #3: “Which medical expenses can we take into account to determine when the HDHP deductible is satisfied for purposes of a flex spending account (FSA) or health reimbursement account (HRA)?”

IRS’s answer: The regs spell out what types of medical expenses may — and may not — be put towards the deductible. For example, if the HDHP doesn’t cover chiropractic care, then any of those expenses may not be counted towards the employee’s deductible. And even if the individual racks up legitimate expenses, they cannot be reimbursed until the deductible’s met.

Question #4: “How do we apply the maximum annual HSA contribution limits to a married couple when one has self-only HDHP coverage and the other has family coverage?”

IRS’s answer: The maximum contribution in that case is the maximum for family coverage. As for how the contribution can be divided? Leave it up to the spouses to agree on that.

Question #5: “Yikes! We were contributing to the HSA of an employee who we later realized was never eligible. Can we recoup our cash?”

IRS’s answer: Yes — but you’ll have to move fast. If you don’t recover the amounts by the end of that year, the amounts go on that employee’s W-2 as gross income and wages.

Question #6: “We’re looking to cut down on paper. Can we administer our HSA through a debit card that restricts payments and reimburses to health care?”

IRS’s answer: Yes, as long as employees have other ways to pay for health care than solely the debit card, like ATM withdrawals or by writing checks. (And you must make that clear to employees.)

Question #7: “An employee wants to borrow money from her HSA — is that OK?”

IRS’s answer: No way — that’s considered a prohibited transaction. As more and more people find themselves in dire financial straits, you’ll come up against this in months to come. Be crystal clear — any loan or extension of credit between a plan and an employee is not allowable.

Tags: Health Reimbursement Account (HRA), health savings accounts (HSAs), IRS

3 Responses to “7 trickiest health savings account questions answered”

Mary Jane Ritchey Says:
August 4th, 2008 at 3:56 pm
I can’t resist giving my personal opinion of HSAs. I think (after being in one for a year) that they are only a means of of big insurance companies sucking people dry. While the employee struggles to pay his doctor and perscriptions, etc. the insurance company sits back and collects hundreds of dollars per month per employee. And, you guessed it, it doesn’t cost them one red cent. Overall, it costs the employee & employer around $12,000 per year. For What? We have to pay more for visits because we carry an insurance card. If you tell the Doctor you don’t have insurance, your bill drops almost in half. The only thing an HSA is good for is if you have a major accident or illness. Please let it be known to all employers that even though Ins. Co. try to make you believe you will be saving and be able to offer this great package to their employees, Don’t buy it! They get big bucks, and you get NOTHING.
J M Barber Says:
August 4th, 2008 at 6:11 pm
Interesting comment from MJR (8/4/2008) and I can relate to the frustration, unfortunately, the real problem with Consumer Driven Health Plans (CDHP) accompanied with an HSA (Health Savings Account), is a lack of consumer training, which is certainly not on the shoulders of MJR. These health care plans are, without a doubt, more complicated than your traditional health care plan, however, there is potential to save money (both employer and employee).

After serving in the health care field for 30+ years, I truly believe that the only answer to our skyrocketing health care costs lays in the hands of the consumer - that’s you and me. Although foreign to us, it’s time we take this product in hand, learn more about it, and change the trend!

CDHP with an HSA:
1. Typically, you have a traditional health care plan through an employer. The yearly deductible is high - there are certain required criteria for coverage.
2. You have an “employee owned” HSA account. That means you take the account with you - it’s your account for always.
3. Your employer can decide to contribute a set amount of money - normally annually - into your HSA to offset or help offset your yearly deductible. You can contribute to the account. IRS has limitations on the yearly amount that can be contributed.
4. You incur, for example, a $500 x-ray charge. The doctor/radiologist files the $500 claim with your traditional insurance carrier.
5. Your insurance carrier applies the $500 to your yearly deductible.
6. You receive an Explanation of Benefits (EOB) from the insurance carrier reflecting the $500 amount put toward your yearly deductible.
7. You fax or send the EOB into your HSA vendor. If you have funds in your account, you get a $500 check - you pay the doctor/radiologist.

Yes, the above example is simplified but basically that’s it in a nutshell. With this type of health care plan, an individual has to setup a filing system to monitor health claims, insurance EOBs, and HSA account information. The sacrifice in trying to control health care costs is our time, which is definitely sacred to most of us, however, I think it will be worth it in the long run.

One thing to keep in mind, if you stay as healthy as you can and build up money in your HSA account, at retirement age (currently 65), you can take the money out and buy yourself a new car if you’d like! Well, you may want to just hold on to it to help offset the medical expenses not covered by Medicare but at least it’s your account - you own it.

Lastly, just a comment, most of us have high deductibles ($500 or more) on our auto insurance. We pay for the maintenance on our vehicles such as oil changes, new spark plugs, tire rotation etc. How much do we put into the maintenance of our own health?
D Lail Says:
August 5th, 2008 at 7:51 am
As a participant and plan administrator of an HSA and HRA, I have to disagree. The first year transition is the hardest. I would rather reduce my premium by half and put that half into a “medical IRA”, earn interest tax-free, accept my ERs contribution to my HSA, have my employer reimburse me the first 50% of my OOP max under the HRA, than give the insurance company ALL that in premiums. I’m a moderate user. I recognize the pain of deductibles, but people don’t realize they were paying just as much in premiums and co-pays that never applied to deductibles, then would have to pay the deductibles. High users don’t build a fund, but even if they use the HSA as fast as it’s funded, it’s with pre-taxed dollars. It’s tough for high users at the beginning, but at the end they receive more in benefits than a traditional plan. For low-users, it’s a way to really build some savings; for moderate users, it’s probably a wash. The philosophy differs considerably from HMOs and low copays, which is how we got into this mess.