Employers continue to implement high deductible health plans (HDHP) and consumer directed accounts like Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSA) to help curb the rising cost of health premiums as well as help employees become better stewards of health care dollars.
The 2017 Midyear Devenir HSA Market Survey released last week gathered information from the top 100 HSA providers for the period ending June 30, 2017. The survey reports that Health Savings Accounts surpassed 21 million accounts, holding about $42.7 billion in assets, which is an increase of 23% in assets and 16% in accounts compared to the same time period last year. Consumer Directed Health Plans (CDHPs) with HSAs continue to grow.
If you are looking at implementing a Health Savings Account during this upcoming 2018 open enrollment season, you should carefully review the details of your existing benefit plan(s), in order to identify any issues and make any required modifications in advance when possible to preserve HSA eligibility.
Review the following items to ensure a successful HSA implementation:
- Do you have the required health plan? - To be HSA compatible, the required minimum health plan deductibles for 2018 ($1,350 Single or $2,700 Family) and maximum out of pocket limits ($6,650 Single or $13,300 Family) are required. First dollar coverage is only permitted for preventive care, dental or vision expenses; there can be no co-pays for prescriptions or office visits.
- Do you have any disqualifying coverage? - Do you have an HRA that reimburses medical expenses before the minimum HDHP deductible? Do any employees participate in a regular Health Care Flexible Spending Account (FSA), either through the employer plan or through a spouse or parent’s plan? These are all examples of disqualifying coverage that will make an individual ineligible for an HSA.
- Do you have an HSA compatible Health FSA in your cafeteria plan? - Limited Health Care FSAs are compatible with HSAs, because reimbursement is restricted to dental and vision expenses. An employee can participate in both the Limited Health Care FSA and contribute to the HSA at the same time. A plan amendment may be required to add this type of FSA to your cafeteria plan.
- Do you have an HRA and is it HSA-Compatible? – HRAs that do not reimburse until after the minimum required HDHP deductibles ($1,350 Single and $2,700 Family) have 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 and is a great way to stretch the tax savings. Note: The minimum HDHP deductibles are changing in 2018. If you had an HRA in 2017, a plan amendment may be required to ensure that the HRA is HSA compatible.
- Do you have a Grace Period in your cafeteria plan? – Does your Health Care FSA have a 2 ½ month grace period? The grace period will delay HSA eligibility until the first of the month following the grace period if an employee has a balance in a regular Health Care FSA on the last day of the prior plan year.
- 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 regular Health Care FSA at the end of the 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. Changes in plan design may enable the employee to make HSA contributions sooner. Consult with a trusted advisor and/or Third Party Administrator to discuss possible workarounds.
- Will the employer and/or employee make contributions to the HSA? – Employees and employers can fund HSAs through the cafeteria plan if the plan document permits. 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. All HSA contributions made through the cafeteria plan are pretax at the point of payroll deduction which will give employees a tax break sooner than if they waited until the end of the year on their tax returns. Note that HSA contributions made through the cafeteria plan will be subject to nondiscrimination testing.
- Does your cafeteria plan year renew at the same time as your health insurance plan? Timing is Everything! –Consider aligning the renewal dates prior to moving to the HDHP, because making health plan changes mid-cafeteria plan year will not constitute a reason to modify Health Care FSA elections mid-plan year. 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 his/her HSA eligibility, gain the greatest tax advantages, as well as help them to become better-informed health care consumers.