Can Your Company Inadvertently Disqualify You from an HSA? Yes!

Employers who offer a Health Savings Account don't mean to disqualify employees from opening and funding accounts. But sometimes they do.

At a high level, Health Savings Account eligibility isn't difficult:

• You can't qualify as anyone's tax dependent.
• You must be covered by an HSA-qualified plan.
• You can't have any disqualifying coverage.

Simple, except that it isn't. Some plans that look like they're HSA-qualified aren't. And some workplace programs and services that don't look like coverage are defined that way under federal tax law and may be disqualifying.

Let's look at some common situations that may disqualify employees from opening and funding a Health Savings Account.

General Health FSA

The traditional Health FSA in which you've participated for years disqualifies you from opening and funding a Health Savings Account. Under federal tax law, a Health FSA is considered a medical plan. That designation may seem strange to you, as it's not a "plan." Rather, it's a reimbursement account that is funded with your salary and returns the money to you.

But think about it. It's an annual reimbursement plan. You determine the value of the Health FSA (up to the $2,850 federal limit, or a lower ceiling set by your company). You usually pay 100% of the premium (the value that you chose for the Health FSA). [Employers can contribute - that is, increase the value of the plan and pay a portion of the premium - but most don't.] Your reimbursements may be less than your premium (you underspend your account, resulting in forfeiture of a portion of your premium dollars), equal to your premium (you spend every penny), or greater than your premium (you overspend your account and then leave the plan - usually by leaving employment - before the end of the year).

A general Health FSA is disqualifying because it provides first-dollar reimbursement for qualified medical, dental, vision, and over-the-counter expenses. But there is a plan design - the Limited-Purpose Health FSA - that's not disqualifying. This design limits reimbursement to dental and vision expenses. Both dental and vision are excepted benefits, which means that you can enroll in any form of dental or vision coverage - insurance, a reimbursement plan, a discount plan - without disqualifying yourself from opening and funding a Health Savings Account.

You are responsible for knowing the compliance rules. And not all employers who offer a Health FSA offer both a general and Limited-Purpose Health FSA option. Your company isn't required by law to educate you on the difference and when each plan is appropriate. But it is required to ensure that anyone enrolled in its general Health FSA doesn't also make pre-tax payroll contricutions to a Health Savings Account.

That moral obligation to educate you and the compliance requirement to make sure you don't enroll in the general Health FSA and the Health Savings Account program should protect you from being disqualified. But your benefits team may not understand those nuances, in which case the company's benefits could trip you up.

Integrated Health Reimbursement Arrangement

Many employers offer an HRA integrated with a medical plan to lower covered workers' out-of-pocket costs. An HRA is an employer-funded account that usually pays a portion of a medical plan's deductibles and perhaps coinsurance. For example, a company may increase its deductible for self-only coverage from $1,500 to $3,000, then offer an HRA that reimburses the final $1,500 of the higher deductible. The net effect is that the employee still pays only $1,500, but the higher deductible lowers premiums (benefiting both the company and employees). The company returns some - but usually not all - of those premium savings to employees in the form of reimbursements for high deductible expenses.

But integrating an HRA can be dangerous. The employee's net deductible responsibility can't be lower than the $1,400/$2,800 statutory minimum annual deductible described above. If it is, the HRA disqualifies the plan, and no employee can open or fund a Health Savings Account.

Example: The company offers a medical plan with a $4,000 self-only and $8,000 family deductible. It integrates an HRA that reimburses all deductible expenses after $1,200 and $2,400. The plan isn't HSA-qualified because one aspect of coverage - the HRA - begins to pay claims before the employee has satisfied the minimum $1,400/$2,800 deductible.

Employers can offer an integrated HRA-medical plan that is compliant and helps employees manage their out-of-pocket costs. They simply must ensure that the HRA meets the definition of a Post-Deductible HRA (no reimbursement before $1,400/$2,800) to allow employees to open and fund a Health Savings Account.

Onsite Facilities

Some employers with large worksites (at least before the pandemic sent many employees to home offices - permanently) realized the value of offering some medical care onsite. This program made care convenient for employees, which reduced absenteeism, encouraged treatment, and led to happier, healthier employees. A typical onsite clinic might include a physician or physician assistant to diagnose and treat simple conditions - including non-serious work-related injuries. Also, the facility might be staffed to provide services that workers need to access one or more times per week for a limited time - think behavioral health, physical therapy, chiropractic care - to reduce employees' leaving work to receive care elsewhere.

These services may improve morale, decrease absenteeism, and improve productivity. But if employees enrolled in HSA-qualified plans aren't charged a market rate for these services, receiving care may disqualify them from opening and funding a Health Savings Account.

Example: ABC Company has many employees with back injuries in its production and distribution facilities. It hires a chiropractor to offer services three mornings a week to deliver care. Unless employees are charged a market rate for these services, they can't open or fund a Health Savings Account.

Employees who work for a medical provider are particularly susceptible to this type of disqualification. You sneak in for a complimentary MRI at the end of the workday to diagnose your sore knee? Your physical therapist co-worker offers some treatments she works on other patients? These services could be disqualifying for you - but not for co-workers who don't utilize free or discount care. In this case, utilization rather than plan design or availability of free or discount care, is the disqualifying factor.

Waiting in the Wings: Telemedicine

Today, many medical plans have incorporated telemedicine as a benefit. Virtual medicine is convenient and generally has a lower cost structure than an in-person office visit, so patients - particularly those with chronic conditions or on regular therapy, like behavioral health courses of treatment - are more compliant, and the price is usually lower than meeting a clinician in his or her office.

A decade ago - and sometimes today - companies offered a telemedicine plan independent of the medical plan. But diagnostic services and treatments must be applied to the deductible. So, telemedicine services that offer diagnostic care below the deductible are ordinarily disqualifying.

Example: XYZ, LLC, contract with a local provider group to provide virtual medicine services to employees. The incentive: Employees pay only $5 per consult, so they benefit. And the price charged to the company (its plan is self-insured) is only $35, rather than $100 or more for an in-office visit. This arrangement is disqualifying.

During the pandemic, the federal government offered regulatory relief (agencies of the executive branch made this decision) by allowing telemedicine below the deductible for plans years beginning on or before Jan. 1, 2022. In March 2022, Congress extended this relief for the months of April through December 2022. After this year, telemedicine services below the deductible will be disqualifying unless Congress acts.

The Bottom Line

Plan design is important, and often it's the tripwire that leads to disqualification. But sometimes other factors make a difference. though compliance - including determining eligibility - is ultimately an individual's responsibility, a sharp benefits advisor and informed employer can identify potential problems and remove barriers to employees' eligibility to open and fund a Health Savings Account.

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