Can an Onsite Clinic Close One Day a Month or Year to Allow HSA Funding?

It's an interesting question for those who understand Health Savings Account eligibility rules (e.g., tax code geeks). But perhaps a strategy not worth pursuing.

To set the stage for this week's exploration of Health Savings Account compliance issues, it's appropriate to keep this adage in mind: Knowledge is knowing that tomatoes are part of the fruit, not vegetable, family. Wisdom is knowing not to add tomatoes to your Fourth of July fruit salad.

A respected benefits attorney recently noted that a client had a novel idea for combining two compelling concepts - an onsite clinic to offer convenient, free care to employees and an opportunity for workers to fund Health Savings Accounts - into a novel proposal to close the clinic one day per month. Why one day? Let's examine the issue.

Eligibility to Fund a Health Savings Account

To be eligible to fund a Health Savings Account, an individual must meet all eligibility requirements as of the first day of the month. That is, she must be covered by an HSA-qualified medical plan, not have non-qualified coverage (like Medicare or TRICARE, or covered by her own or a spouse's general Health FSA), and not qualify as another taxpayer's tax dependent.

Under this standard, an employee who's eligible April 1 and then leaves his job April 2 and doesn't continue his coverage is eligible to contribute for the month of April. His replacement, who starts work April 2 and signs up for immediate coverage on the HSA-qualified plan, isn't eligible to establish her account or contribute before May 1.

Onsite Clinics

A medical clinic sponsored by an employer and located at the work site may be an attractive investment. A clinic allows employees with an unexpected illness or injury - for example, suddenly feeling nauseous or suffering a laceration - to receive immediate care rather than leaving the work site to go home or seek immediate care from their primary-care physician or an urgent-care center. The value proposition for employers is that employees receive more prompt care and may be able to return to work immediately. For employees, the benefit is immediate care, perhaps no loss of pay, and, in most cases, no out-of-pocket cost for care.

A clinic also benefits both employers and employees when it addresses issues that are prevalent in the workforce, such as monitoring medication for a chronic condition, delivering routine musculoskeletal care (such as chiropractic care and physical therapy to treat or prevent common work-related injuries among employees), and perhaps offering behavioral-health counseling and nutritional services.

Not all care delivered onsite is disqualifying. For example, an employee who self-treats an injury or illness by taking ibuprofen pills or bandages from a workplace first-aid kit aren't deemed to be receiving substantial medical care below the deductible. But any care administered by a medical professional - physician, therapist, nurse, nurse practitioner, physician assistant, chiropractor - would be deemed care rendered below the deductible and thus disqualifying.

The Compliance Issue

Onsite clinics (or, by extension, a local urgent-care facility with a financial agreement to treat a company's work force at no cost - or below-market prices - to employees) pose a problem for Health Savings Account eligibility, as the Internal Revenue Service pointed out in 2008 in guidance on Health Savings Accounts (see Q&A 10 here). Individuals who are funding a Health Savings Account and receive diagnostic or treatment services (in other words, non-preventive care) that are covered prior to satisfying the deductible lose their eligibility to contribute for that month.

Example: Grace receives care from the chiropractor whom her company hires to deliver services two mornings per week. She doesn't pay for this service. She's disqualified from contributing to her Health Savings Account that month.

A Traditional Solution

An employer that offers an onsite clinic can resolve this issue by charging employees the market rate for these services. An appropriate fee schedule might be the charges that the company's insurer has negotiated with a comparable independent clinic. This arrangement should remain attractive to employees, since they don't have to go "off the clock" to receive care or, in the case of ongoing care, perhaps apply for intermittent leave under the Family Medical Leave Act (FMLA) to receive care away from the work site.

The challenge is to ensure that those charges are applied to employees' deductibles so that they begin to receive financial coverage once they've satisfied the deductible. If the company self-insures its medical benefits, its third-party administrator can include the onsite clinic in the provider network. If the plan is fully insured, the insurer must contract with the clinic or allow employees to submit claims.

A Radical Solution

A more aggressive option, as posed to the benefits attorney, is to close the clinic on the first day of the month. The line of reasoning: Employees aren't covered and therefore can't receive care on the first day of the month. Therefore (as noted above), they're eligible to contribute for that month.

This approach may, in fact, be a loophole in the law. But rest assured that the IRS would challenge the claim. The case would then go to tax court, where judges would determine whether this arrangement passes muster. If I were a betting man, I wouldn't place a wager on an outcome favorable to the company.

A Calendar Quirk

But here's an interesting twist. Thanksgiving, celebrated on the fourth Thursday of November, can occur as late as Nov. 28 (as it did most recently in 2019). That means that Dec. 1 falls on a Sunday. Assuming the clinic isn't open on Sundays, employees aren't covered and can't receive care Dec. 1.

What makes this calendar quirk interesting is the Last-Month Rule. A provision in the Health Opportunity and Patient Empowerment (HOPE) Act of 2006 allows individuals who are HSA-eligible on Dec. 1 to make a full contribution for that year (rather than pro-rating their deposits based on the number of months that they were eligible as of the first day of the month).

Example: Kono enrolls in her company's HSA-qualified plan effective Oct. 15. If she meets all eligibility requirements by Dec. 1, she can contribute up to $3,650 (the statutory maximum for self-only coverage in 2022).

The caveat is the individual must remain HSA-eligible through the end of the following calendar year (2023 in the example above). If she loses eligibility before the end of the following calendar year (a span referred to as the testing period), she must include all contributions above her pro-rated maximum in taxable income and pay a 10% additional tax.

Would this calendar quirk allow an employee who receives regular care (say, weekly or biweekly behavioral-health counseling) at no out-of-pocket cost through an onsite clinic to fund her Health Savings Account up to the statutory limit that year? Again, the odds are long. But a worker or a company may have a somewhat stronger case because the calendar - not a specific action on the employer's part to close the clinic every first day of the month, regardless of the day of the week - is dictating when the clinic is closed.

The Bottom Line

Employers can find ways to allow their Health Savings Account programs and onsite clinics to co-exist. By offering services at market rates and applying those amounts to the deductible for employees funding a Health Savings Account (employers can charge a copy or cover services in full for other workers), employers can ensure that the onsite clinic isn't disqualifying without the threat of an IRS challenge.

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