Can the Federal Government Really Disqualify You from Funding an HSA?

Can the Federal Government Really Disqualify You from Funding an HSA?

You wouldn't think the federal government would disqualify its own program. But it could.

This is the sixth and final installment in this series of entities and people other than the account owner who can disqualify someone from opening and funding a Health Savings Account. In previous articles, we've looked at companies, insurers, spouses, parents, and state governments.

Among the entities on the list of potential Health Savings Account spoilers, the federal government should rank near the bottom. The issue, though, isn't its place in the rankings, but that it's there at all.

How can the federal government disqualify someone from opening and funding a savings account that's part of the federal tax code? Let's take a look.

Health Savings Account Eligibility Rules

To open and fund a Health Savings Account, a prospective or current owner must meet three requirements:

  1. Be covered on an HSA-qualified plan (or plans).
  2. Not be enrolled in or covered by any disqualifying plans.
  3. Not qualify as another taxpayer's tax dependent.

Usually, the culprit is No. 2. The two most common disqualifiers are the owner's enrollment in Medicare or the owner's or spouse's participation in a general Health FSA program. But in the case of the federal government's potential role in disqualification, the culprit isn't No. 2, but rather No. 1 above.

HSA-qualified plan

The design of an HSA-qualified plan is straightforward. All services except select preventive care are applied to a deductible that must be at least $1,500 for self-only coverage and $3,000 for a family plan in 2023 (the 2022 figures are $1,400 and $2,800). The out-of-pocket maximum can't exceed $7,500 for self-only coverage and $15,000 for a family plan in 2023 (up from $7,050 and $14,100 in 2022). Most employers sponsor plans with higher deductible and lower out-of-pocket ceilings.

Nongroup Market

The Affordable Care Act of 2010 ushered in a new era of federal regulation over state nongroup markets. Prior to passage of the landmark federal law, states determined the types of plans that were offered to nongroup (defined as people who purchase coverage outside an employer arrangement) buyers. Those plan designs varied dramatically from state to state.

The Affordable Care Act overlaid federal standards to the state plans. State can still mandate benefits, set patient access standards, and adjust patient cost-sharing within ranges, but all nongroup plans nationally must meet certain federal requirements, including maximum out-of-pocket responsibility (the sum of deductibles, coinsurance, and copays) of no more than $9,100 for self-only coverage and $18,100 for a family plan in 2023 (up from $8,700 and $17,400 in 2022).

The act also established public marketplaces (often called public exchanges) in each state. States were empowered to design and run their own marketplaces. The federal government runs the public marketplaces in states that didn't establish their own. Only about one-third of states run their own marketplaces. Whether the market is federal- or state-facilitated, the federal rules apply.

Actuarial Value and the Nongroup Market

The most threatening federal standard for Health Savings Account owners is actuarial value. This term refers to the percentage of average claims that an insurer pays for covered services (versus the patient's out-of-pocket responsibility)

Example: An insurer offers a plan that covered $100 million in claims last year. The insurer paid $70 million, and patients paid the remaining $30 million through deductibles, coinsurance, and copays. This plan has an actuarial value of 70%.

The Affordable Care Act uses actuarial value to place plans into metallic tiers. The objective is to cluster plans with similar cost-sharing so that potential buyers can shop easily for competing insurers' plans within a range of out-of-pocket responsibility and premiums. The plans must fall within a tight range of +2% to -2% of each metallic tier:

  • Platinum: 90% (88% to 92%).
  • Gold: 80% (78% to 82%).
  • Silver: 70% (68% to 72%).
  • Bronze: 60% (58% to 62%).

Insurers adjust their cost-sharing variables (deductibles, coinsurance, and copays) to fit plans within the required ranges.

The Health Savings Account/ACA Conflict

Early on, HSA-qualified plans fit neatly into the metallic-tier ranges mandated by the ACA - generally at the silver and particularly at the bronze level. During the past couple of years, though, the task has become more difficult. Why? Because the ACA limit on out-of-pocket financial responsibility ($9,100/$18,200) is much higher than the HSA-mandated limit of $7,500/$15,000).

You may not the irony here. HSA-qualified plans, referred to in legislation as high deductible health plans, impose a ceiling on patient financial responsibility that's far (more than 21%) lower than the limit imposed across the board in a law designed make increase affordability of coverage and care.

Thus, to hit the metallic-tier ranges, non-HSA-qualified plans have much more flexibility to adjust patient cost-sharing upward. HSA-qualified plans do not.

Example: A plan with a $6,000 self-only deductible and a $7,500 out-of-pocket maximum has an actuarial value of, say, 64%. If the plan is non-HSA-qualified, the insurer may be able to bump up the out-of-pocket maximum to $9,100 to gain the two-point reduction in actuarial value needed to fit within the silver range. In contrast, the insurer offering the HSA-qualified plan can't adjust the out-of-pocket maximum because it's already at the limit for an HSA-qualified plan. It may be able to get within the range by increasing the deductible to, say, $7,200. But that plan is much less attractive within the bronze metallic tier. And next year, if the HSA-qualified out-of-pocket maximum doesn't increase enough, the insurer won't be able to offer that plan with an attractive price point in any state's nongroup market.

This problem is particularly unfortunate because Congress set the base out-of-pocket figure, which is adjusted annually for inflation. The inflation indexes used by the Department of Treasury/Internal Revenue Service for HSA-qualified plans and by the Department of Health and Human Services for ACA-compliant plans is different. Absent legislative changes, the HSA-qualified plan out-of-pocket ceiling will always be lower than the ACA-mandated limit and will rise more slowly.

Ordinarily, this differential would be a boon for HSA-qualified plans, whose lower out-of-pocket limits would be expected to attract shoppers focused on their responsibility in a worst-case scenario. But not in a world in which plans must fit within tight ranges of actuarial value.

Extent of the Damage

This issue doesn't affect employer-sponsored plans, which cover more than 160 million Americans. But it does affect the coverage options for about 12 million Americans who are self-employed, are unemployed, or work for a company that doesn't offer benefits (or they don't qualify for employer-sponsored coverage).

Sadly, these are the buyers who need Health Savings Accounts most. They don't qualify for an employer-sponsored Health FSA, which also offer the benefit of tax-free reimbursement of qualified medical, dental and vision services, as well as over-the-counter drugs, medicine, equipment, and supplies. Sadly, the ACA ranges will disqualify a growing number of potential HSA-qualified plans that allow these hard-working Americans to build an emergency medical fund with pre-tax dollars and save for retirement medical expenses.

The Bottom Line

Expect to see fewer HSA-qualified plans in the nongroup market in the future, whether you shop through a public or private marketplace or directly from an insurer. They will soon disappear from all but the bronze tier. And eventually, they may be squeezed out of the nongroup market altogether. All because Congress set two different standards and hasn't signaled an intent to create one uniform out-of-pocket maximum (perhaps at the lower, HSA-qualified level, to reduce the prevalence of medical bankruptcies?). It's time to address this issue to ensure that hard-working Americans have access to a tax-advantaged reimbursement account when their only "crime" is not being eligible to purchase employer-sponsored coverage

#HSAMondayMythbuster #HSAWednesdayWisdom #HSA #HealthSavingsAccount #TaxPerfect



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