You May Have Been Disqualified. Learn How to Diagnose and Fix the Issue.

A temporary provision allowing HSA-qualified plans to cover non-preventive telemedicine services expired. Then it was reauthorized. But not retroactively.

If your HSA-qualified plan offered telemedicine benefits below the deductible during the first quarter of 2022, you may be temporarily disqualified from funding your Health Savings Account. Or not.

Your insurer or employer should have adjusted the benefit to apply to the deductible (and can still do so retroactively by reprocessing claims). But some may not have, in anticipation of legislation retroactively allowing the below-the-deductible coverage to continue. But that legislation didn't deliver all that proponents had hoped.

Here's what you need to know.

Telemedicine below the Deductible

During the pandemic, many physician offices closed. Waiting and exam rooms, breeding grounds for a self-selected population of sick patients and germs before the pandemic, were seen as potential mega-spreaders of Covid-19. Also, in some cases, medical personnel were redeployed to treating Covid-19 patients rather than addressing injuries, other illnesses, and conditions.

Congress responded by allowing HSA-qualified plans to cover all telemedicine - even those that diagnosed or treated an injury, illness, or condition - below the deductible with no or limited patient cost-sharing. This design proved popular with employers, and 96% of plans adopted the measure.

That authority expired for coverage whose plan years began Jan. 1, 2022, or later. Then, in early March, Congress extended this provision, but with a twist. The new legislation doesn't apply retroactively to Jan. 1, 2022, and it's based on the date of service rather than the beginning of the plan year. Under the new legislation, all telemedicine services received between April 1, 2022, and Dec. 31, 2022, can be covered below the deductible on HSA-qualified plans.

The IRS has been asked whether it plans to apply the relief retroactively. The agency's position: Congress knows how to write rules that apply retroactively. It didn't do so in this case.

Thus, we're living in a world in which there's a three-month gap in which the telemedicine exception doesn't apply. Translation: Anyone enrolled in an HSA-qualified plan that covered diagnostic and treatment telemedicine visits below the deductible between Jan. 1, 2022, and March 31, 2022, does not have qualifying coverage to fund a Health Savings Account for those months.

Diagnosing Your Status

The anniversary date of your coverage determines whether you face a compliance issue if your plan allowed pre-deductible coverage for non-preventive telemedicine.

Your current plan renewed April 1, 2021, or later. You have no compliance issue. Since the original relief applied to plan years that began on or before Dec. 31, 2021, you were compliant during the gap and remain eligible to fund your account for all 12 months in 2022 (barring any other disqualifying event that you experience). You can contribute up to the statutory maximum without relying on the Last-Month Rule (see below).

Your current plan renewed between Jan. 1 and March 31, 2022. Your HSA-qualified medical plan can't cover non-preventive telemedicine visits below the deductible for dates of service during the first quarter of calendar year 2022. Either your insurer (or employer, if your plan is self-insured) applied non-preventive to the deductible during this time, or you weren't covered on an HSA-qualified plan. It's that simple.

If the latter is your situation, you won't be HSA-eligible all 12 months of 2022. That loss of eligibility may affect your maximum contribution in 2022.

Calculating Your Maximum Contribution

If you were covered by an HSA-qualified plan that covered non-preventive telemedicine during any of the first three months of 2022, you can choose one of two contribution options.

Option 1: Prorate your contribution. When you lose eligibility for any portion of a calendar year for any reason, you can prorate your contribution based on the number of months that you are HSA-eligible.

Example: Your employer renewed your HSA-qualified plan Jan. 1, confident that Congress would retroactively rule that non-preventive telemedicine could continue to be covered below the deductible. It didn't. You limit your contribution to 9/12 of the statutory maximum, either $2,737.50 for self-only coverage (9/12 of the $3,650 statutory maximum contribution) or $5,475 for family coverage (9/12 of the $7,300 maximum), plus a catch-up contribution of $750 (9/12 of $1,000).

The advantage of this approach is that you have no follow-up requirements (a concept that will make sense in a moment . . . ). Also, if you're part of the majority of owners who don't fun your Health Savings Account to the statutory limit (only 4% contribute to the ceiling), you lose nothing by facing a lower maximum deposit. The disadvantage is that this prorated amount may not be sufficient to cover your qualified expenses (though you can reimburse them from future contributions and you lose tax benefits that you'd otherwise enjoy with higher contributions.

Option 2. Leverage the Last-Month Rule. Alternatively, you can take advantage of a provision in tax law called the Last-Month Rule. This rule states that if you're HSA-eligible as of the first day of the last month of the year (Dec. 1), you can f und your account as though you've been HSA-eligible all 12 months. This provision allows you to contribute to the statutory limit. But you must remain HSA-eligible through the end of the following year. If you fail this testing period, you must include any excess deposit in your taxable income and pay a 10% additional tax as a penalty.

Example: Same situation as the previous example, but you fund your Health Savings Account to the statutory limit in 2022. You change coverage in July 2023, thereby failing the testing period. You must include an additional $912.50 (3/12 of $3,650) in your 2023 taxable income, plus pay an additional $91.25 (10% of $912.50) as a penalty.

[Note: This example is simplified. You must include the excess contribution and any earnings associated with that excess contribution in your taxable income, then base the 10% penalty off this higher figure.]

Qualified Distributions

If you're newly enrolled in an HSA-qualified plan during the first quarter of 2022 and the plan covered non-preventive telemedicine below the deductible, you have another issue. You can never reimburse expenses tax-free, even qualified expenses, before you've opened (and, in most states, initially funded) your Health Savings Account. And you can't open and fund your account before you're eligible. Thus, you may have expenses that you can never reimburse tax-free from a Health Savings Account - even after you become eligible and fund the account.

Example: Your plan covered non-preventive medicine below the deductible during the first months of 2022. You enrolled effective Jan. 1, 2022. You can't open and fund your Health Savings Account before April 1, 2022 - the first day that you have HSA-qualified coverage. You can never reimburse any expenses tax-free with dates of service or purchase prior to your opening and funding your Health Savings Account. The Last-Month Rule (see above) will help you with contributions, but neither it nor any other provision will allow you to make tax-free distributions for any expenses that you (or your spouse or tax dependent) incur before you open and fund your account.

The Bottom Line

It's likely that few people have lost their eligibility during the first three months of 2022. Insurers and employers should have changed their coverage of the non-preventive telemedicine benefit to apply those services to the deductible once the original pandemic-inspired exception expired. They should not have continued with that level of coverage, anticipating a retroactive legislative solution.

But if the plan did cover non-preventive telemedicine pre-deductible and renewed between Jan. 1 and March 31, 2022, you do have a potential compliance problem. But now you know how to solve the issue as well.

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