Situation 1. An individual is
covered by an HDHP (as defined under
section 223(c)(2)(A)). The HDHP has
an 80/20 percent coinsurance feature
above the deductible. The individual
is also covered by a health FSA
under a section 125 cafeteria plan
and an HRA that meets the
requirements of Notice 2002-45,
2002-2 C.B. 93. The health FSA and
HRA pay or reimburse all section
213(d) medical expenses that are not
covered by the HDHP (such as
co-payments, coinsurance, expenses
not covered due to the deductible
and other medical expenses not
covered by the HDHP). The health FSA
and HRA coordinate the payment of
benefits under the ordering rules of
Notice 2002-45. The individual is
not entitled to benefits under
Medicare and may not be claimed as a
dependent on another person’s tax
return.
Situation 2. Same facts as Situation
1, except that the health FSA and
HRA are limited-purpose arrangements
that pay or reimburse, pursuant to
the written plan document, only
vision and
dental expenses (whether
or not the minimum annual deductible
of the HDHP has been satisfied). In
addition, the health FSA and HRA pay
or reimburse preventive care
benefits as described in Notice
2004-23, 2004-15 I.R.B. 725.
Situation 3. Same facts as Situation
1, except that the individual is not
covered by a health FSA. Under the
employer’s HRA, the individual
elects, before the beginning of the
HRA coverage period, to forgo the
payment or reimbursement of medical
expenses incurred during that
coverage period. The decision to
forgo the payment or reimbursement
of medical expenses does not apply
to permitted insurance, permitted
coverage and preventive care
(“excepted medical expenses”). See
section 223(c)(1)(B) and Notice
2004-23. Medical expenses incurred
during the suspended HRA coverage
period (other than the excepted
medical expenses if otherwise
allowed to be paid or reimbursed by
an HRA), cannot be paid or
reimbursed by the HRA currently or
later (i.e.,
after the HRA suspension ends).
However, the employer decides to
continue to make employer
contributions to the HRA during the
suspension period and thus the
maximum available amount under the
HRA is not affected by the
suspension but is available for the
payment or reimbursement of the
excepted medical expenses incurred
during the suspension period as well
as medical expenses incurred in
later HRA coverage periods.
Situation 4. Same facts as Situation
1, except that the health FSA and
HRA are post-deductible arrangements
that only pay or reimburse medical
expenses (including the individual’s
20 percent coinsurance
responsibility for expenses above
the deductible) after the minimum
annual deductible of the HDHP has
been satisfied.
Situation 5. Same facts as Situation
1, except that the individual is not
covered by a health FSA. The
employer’s HRA is a retirement HRA
that only reimburses those medical
expenses incurred after the
individual retires.
Section 223(a) allows a deduction
for contributions to an HSA for an
“eligible individual” for any month
during the taxable year. Section
223(c)(1)(A) provides that an
“eligible individual” means, with
respect to any month, any individual
who is covered under an HDHP on the
first day of such month and is not,
while covered under an HDHP,
“covered under any health plan which
is not a high deductible health
plan, and which provides coverage
for any benefit which is covered
under the high deductible health
plan.”
Section 223(b) provides a limit on
amounts that can be contributed to
an HSA. The maximum annual
contribution limit for an eligible
individual with self-only coverage
is the amount required by section
223(b)(2)(A). The maximum annual
contribution limit for an eligible
individual with family coverage is
the amount required by section
223(b)(2)(B).
Section 223(c)(2)(A) defines an HDHP
as a health plan that satisfies
certain requirements with respect to
minimum annual deductibles and
maximum annual out-of-pocket
expenses. Generally, if
substantially all of the coverage in
a health plan that is intended to be
an HDHP is provided through a health
FSA or HRA, the health plan is not
an HDHP.
In
addition to coverage under an HDHP,
section 223(c)(1)(B) provides that
an eligible individual may have
specifically enumerated coverage
that is disregarded for purposes of
the deductible. Coverage that may be
disregarded includes “permitted
insurance” and other specified
coverage (“permitted coverage”).
“Permitted insurance” is coverage
under which substantially all of the
coverage provided relates to
liabilities incurred under workers’
compensation laws, tort liabilities,
liabilities relating to ownership or
use of property, insurance for a
specified disease or illness, and
insurance that pays a fixed amount
per day (or other period) of
hospitalization. “Permitted
coverage” (whether through insurance
or otherwise) is coverage for
accidents, disability,
dental care,
vision care or long-term care.
Section 223(c)(2)(C) also provides a
safe harbor for the absence of a
preventive care deductible. See
Notice 2004-23.
The
legislative history of section 223
explains these provisions by stating
that “eligible individuals for HSAs
are individuals who are covered by a
high deductible health plan and no
other health plan that is not a high
deductible health plan.” The
legislative history also explains
that, “[a]n individual with other
coverage in addition to a high
deductible health plan is still
eligible for an HSA if such other
coverage is certain permitted
insurance or permitted coverage.”
H.R. Conf. Rep. No. 391, 108th
Cong., 1st Sess. 841 (2003).
Section 125(a) states that no amount
will be included in the gross income
of a participant in a cafeteria plan
solely because, under the plan, the
participant may choose among the
benefits of the plan. Section 125(d)
defines a cafeteria plan as a
written plan under which
participants may choose among two or
more benefits consisting of cash and
qualified benefits.
Section 125(f) defines qualified
benefits as any benefit not included
in the gross income of the employee
by reason of an express provision in
the Code. Qualified benefits include
employer-provided accident and
health coverage under section 106,
including health FSAs.
Notice 2002-45, 2002-2 C.B. 93,
describes the tax treatment of HRAs.
The notice explains that an HRA that
receives tax-favored treatment is an
arrangement that is paid for solely
by the employer and not pursuant to
a salary reduction election under
section 125, reimburses the employee
for medical care expenses incurred
by the employee and by the
employee’s spouse and dependents,
and provides reimbursement up to a
maximum dollar amount with any
unused portion of that amount at the
end of the coverage period carried
forward to subsequent coverage
periods.
Notice 2002-45, Part IV, states that
if an employer provides an HRA in
conjunction with another accident or
health plan and that other plan is
provided pursuant to a salary
reduction election under a cafeteria
plan, then all the facts and
circumstances are considered in
determining whether the salary
reduction is attributable to the HRA.
An accident or health plan funded
pursuant to salary reduction is not
an HRA and is subject to the rules
under section 125.
Under section 223, an eligible
individual cannot be covered by a
health plan that is not an HDHP
unless that health plan provides
permitted insurance, permitted
coverage or preventive care. A
health FSA and an HRA are health
plans and constitute other coverage
under section 223(c)(1)(A)(ii).
Consequently, an individual who is
covered by an HDHP and a health FSA
or HRA that pays or reimburses
section 213(d) medical expenses is
generally not an eligible individual
for the purpose of making
contributions to an HSA. See Rev.
Rul. 2004-38, 2004-15 I.R.B. 717,
which holds that an individual who
is covered by an HDHP that does not
provide prescription drug coverage
and a separate prescription drug
plan or rider that provides benefits
before the minimum annual deductible
of the HDHP has been satisfied is
not an eligible individual for HSA
purposes.
However, an individual is an
eligible individual for the purpose
of making contributions to an HSA
for periods the individual is
covered under the following
arrangements:
Limited-Purpose Health FSA or HRA.
A limited-purpose health FSA that
pays or reimburses benefits for
“permitted coverage” (but not
through insurance or for long-term
care services) and a limited-purpose
HRA that pays or reimburses benefits
for “permitted insurance” (for a
specific disease or illness or that
provides a fixed amount per day (or
other period) of hospitalization) or
“permitted coverage” (but not for
long-term care services). In
addition, the limited-purpose health
FSA or HRA may pay or reimburse
preventive care benefits. The
individual is an eligible individual
for the purpose of making
contributions to an HSA because
these benefits may be provided
whether or not the HDHP deductible
has been satisfied.
Suspended
HRA. A suspended HRA,
pursuant to an election made before
the beginning of the HRA coverage
period, that does not pay or
reimburse, at any time, any medical
expense incurred during the
suspension period except preventive
care, permitted insurance and
permitted coverage (if otherwise
allowed to be paid or reimbursed by
the HRA). The individual is an
eligible individual for the purpose
of making contributions to an HSA.
When the suspension period ends, the
individual is no longer an eligible
individual because the individual is
again entitled to receive payment or
reimbursement of section 213(d)
medical expenses from the HRA. An
individual who does not forgo the
payment or reimbursement of medical
expenses incurred during an HRA
coverage period, is not an eligible
individual for HSA purposes during
that HRA coverage period.
If
an HSA is funded through salary
reduction under a cafeteria plan
during the suspension period, the
terms of the salary reduction
election must indicate that the
salary reduction is used only to pay
for the HSA offered in conjunction
with the HRA and not to pay for the
HRA itself. Thus, the mere fact that
an individual participates in an HSA
funded pursuant to a salary
reduction election does not
necessarily result in attributing
the salary reduction to the HRA.
Post-Deductible Health FSA or HRA.
A post-deductible health FSA or HRA
that does not pay or reimburse any
medical expense incurred before the
minimum annual deductible under
section 223(c)(2)(A)(i) is
satisfied. The individual is an
eligible individual for the purpose
of making contributions to the HSA.
The deductible for the HRA or health
FSA (“other coverage”) need not be
the same as the deductible for the
HDHP, but in no event may the HDHP
or other coverage provide benefits
before the minimum annual deductible
under section 223(c)(2)(A)(i) is
satisfied. Where the HDHP and the
other coverage do not have identical
deductibles, contributions to the
HSA are limited to the lower of the
deductibles. In addition, although
the deductibles of the HDHP and the
other coverage may be satisfied
independently by separate expenses,
no benefits may be paid before the
minimum annual deductible under
section 223(c)(2)(A)(i) has been
satisfied.
Retirement HRA. A
retirement HRA that pays or
reimburses only those medical
expenses incurred after retirement
(and no expenses incurred before
retirement). In this case, the
individual is an eligible individual
for the purpose of making
contributions to the HSA before
retirement but loses eligibility for
coverage periods when the retirement
HRA may pay or reimburse section
213(d) medical expenses. Thus, after
retirement, the individual is no
longer an eligible individual for
the purpose of the HSA.
In
the arrangements described, the
individual does not fail to be an
eligible individual under section
223 and may contribute to an HSA. In
addition, combinations of these
arrangements which are consistent
with these requirements would not
disqualify an individual from being
an eligible individual. For example,
if an employer offers a combined
post-deductible health FSA and a
limited-purpose health FSA, this
would not disqualify an otherwise
eligible individual from
contributing to an HSA.
An
individual may not be reimbursed for
the same medical expense by more
than one plan or arrangement.
However, if the individual has
available an HSA, a health FSA and
an HRA that pay or reimburse the
same medical expense, the health FSA
or the HRA may pay or reimburse the
medical expense, subject to the
ordering rules in Notice 2002-45,
Part V, so long as the individual
certifies to the employer that the
expense has not been reimbursed and
that the individual will not seek
reimbursement under any other plan
or arrangement covering that expense
(including the HSA).
In
Situation 1, the individual is
covered by an HDHP and by a health
FSA and HRA that pay or reimburse
medical expenses incurred before the
minimum annual deductible under
section 223(c)(2)(A)(i) has been
satisfied. The health FSA and HRA
pay or reimburse medical expenses
that are not limited to the
exceptions for permitted insurance,
permitted coverage or preventive
care. As a result, the individual is
not an eligible individual for the
purpose of making contributions to
an HSA. This result is the same if
the individual is covered by a
health FSA or HRA sponsored by the
employer of the individual’s spouse.
See, Rev. Rul. 2004-38.
In
Situation 2, the individual is
covered by an HDHP and by a health
FSA and HRA that pay or reimburse
medical expenses incurred before the
minimum annual deductible under
section 223(c)(2)(A)(i) has been
satisfied. However, the medical
expenses paid or reimbursed by the
health FSA and HRA include only
vision and
dental benefits (which
are permitted coverage) and
preventive care. All of these
benefits may be covered as a
separate health plan, as a separate
or optional rider, or as part of the HDHP and whether or not the minimum
annual deductible under section
223(c)(2)(A)(i) has been satisfied.
The individual is an eligible
individual for the purpose of making
contributions to an HSA.
In
Situation 3, the individual elects
to forgo the payment or
reimbursement of medical expenses
incurred during an HRA coverage
period. The suspension of payments
and reimbursements by the HRA does
not apply to permitted insurance,
permitted coverage and preventive
care (if otherwise allowed to be
paid or reimbursed by the HRA). The
individual is an eligible individual
for the purpose of making
contributions to an HSA until the
suspension period ends and the
individual is again entitled to
receive, from the HRA, payments or
reimbursements of section 213(d)
medical expenses incurred after the
suspension period.
In
Situation 4, the health FSA and HRA
pay or reimburse medical expenses
(including the 20 percent
coinsurance not otherwise covered by
the HDHP) only after the HDHP’s
minimum annual deductible has been
satisfied. The individual is an
eligible individual for the purpose
of making contributions to an HSA.
In
Situation 5, the HRA is a retirement
HRA that only pays or reimburses
medical expenses incurred after the
individual retires. The individual
is an eligible individual for the
purpose of making contributions to
an HSA before retirement because the
HRA will pay or reimburse only
medical expenses incurred after
retirement.
