Be Careful Not to Let Travel Insurance Disqualify You from Funding Your HSA

Be Careful Not to Let Travel Insurance Disqualify You from Funding Your HSA

Emergency medical travel insurance can fill an important gap when you're on vacation in another country. But be sure to understand the effect of this coverage on your eligibility to fund a Health Savings Account.

A growing number of Americans purchase emergency medical travel coverage to pay for medical care - including transportation - in a foreign country. A standard medical plan (but not necessarily original Medicare and Medicare supplement plans) often covers urgent and emergent coverage anywhere in the world. But not always. And transportation - particularly from a ship to shore or to a distant medical facility that's the closest source of appropriate care - can be expensive and not necessarily covered in full. These potential gaps in coverage prompt a growing number of travelers to purchase coverage to fill the gaps.

But how do these policies affect a traveler's eligibility to fund a Health Savings Account? Like most questions around these accounts, the answer is, "It depends." Let's take a closer look at this coverage and the implications for Health Savings Account eligibility.

Note: A shout-out to the Employers Council on Flexible Compensation, or ECFC, the national trade organization that advocates for and educates policymakers, administrators, employers, and participants/owners on Health Savings Accounts, other tax-advantaged, employer-based reimbursement programs, and COBRA. This topic came up in a lighthearted conversation at ECFC's annual conference last week. This column expands on that brief reference.

Disqualifying Coverage

Travel insurance is generally disqualifying because it pays benefits for diagnostic services or treatment below the statutory minimum annual deductible.

Example: You purchase a policy to cover you during your cruise. You suffer a stroke at sea. You're transported by medical helicopter from the ship to the nearest appropriate hospital, then treated at the hospital. Your emergency medical travel policy covers all expenses in full. If you haven't satisfied the statutory minimum annual deductible for an HSA-qualified plan, you're disqualified from making or receiving contributions to your Health Savings Account that calendar year.

Evaluating Various Forms of Coverage

Let's look at specific forms of coverage to see how they affect your eligibility to fund a Health Savings Account. Note that the policies that we review cover medical care, not payments if you die or are disabled when traveling, or compensate you if you must rebook due to an unexpected change in plans or itinerary.

Trip-specific emergency medical travel policy. If you purchase coverage for a specific trip, you're disqualified during that trip only. If this coverage is important to you, simply avoid traveling during the first day of the month. If you're eligible on the first day of any month, you're eligible to fund your Health Savings Account that month.

Example: You're registered with a cruise line that provides deep discounts on upcoming trips for last-minute travel. After all, if the cruise line can cover its variable costs (food, per-person port fees, etc.) attributable to you, it comes out ahead - even if you're paying a quarter of what the people in the adjoining cabins pay. You have your choice of three week-long cruises during the next month.

In this scenario, if you purchase coverage, be sure your trip doesn't include the first day of the month. Problem solved. You have a four-week window every month to travel without affecting your eligibility to fund your Health Savings Account.

Of course, you can roll the dice by self-insuring (not purchasing coverage) and not face any eligibility issues.

Blanket emergency medical travel coverage. Unlike the first scenario, in which you voluntarily purchase coverage each trip, here you're covered automatically, perhaps through your credit card or your travel agent or other distributor. In this situation, you don't have the option not to purchase coverage. You must make sure that you're not traveling (and therefore aren't covered) on the first day of the calendar month.

HSA-qualified emergency medical travel plan. The most flexible solution is to purchase a policy with a deductible of at least $1,400 for self-only or $2,800 for family coverage, provided such a policy exists.

Example: You purchase a policy with a $3,000 family deductible. You're now covered by two (or more) medical plans: your HSA-qualified medical plan and your emergency medical travel plan. Both plans are HSA-qualified. Therefore, you're not disqualified from funding your Health Savings Account.

In this situation, you can travel any time - even the first day of the month - without losing your opportunity to fund your Health Savings Account for that month.

Measuring the Lost Contribution Opportunity

If you are disqualified for a particular month, all is not lost. Here are two scenarios for funding your Health Savings Account that always apply, whether you lose eligibility because of emergency medical travel insurance or another provision in the tax code:

Prorate your contributions. If you are covered on the first day of a month with a non-HSA-qualified policy, you're not eligible to contribute that month. But if you're eligible the other 11 months, you can fund your Health Savings Account to 11/12 of the statutory maximum. In 2022, that means up to $3,345.83 ($304.16 monthly in 2022) for self-only coverage or $6,691.66 (608.33 monthly in 2022).

Example: You and your family take a 10-day cruise to Alaska from June 3- to July 10, 2022, and purchase an emergency policy. You're disqualified for July. But you are HSA-eligible on the first day of the other 11 months, so you can contribute 11/12 of the statutory maximum contribution.

Leverage the Last-Month Rule. Want to fund your account to the contribution ceiling? Avoid a long Thanksgiving cruise that extends to Dec. 1. The Last-Month Rule states that if you're eligible Dec. 1 (the last month of the calendar year), you have the option to fund your account to the statutory maximum. But any contribution above the prorated maximum is allowed only if you remain HSA-eligible through the testing period, which extends to the end of the following calendar year. If you fail to remain eligible, any amount contributed that exceeds the prorated maximum (plus any earnings on that amount) is included in your taxable income and subject to an additional 10% tax as a penalty.

Example 1: Same facts as the Alaska cruise above. You're not eligible for July 2022, but you still fund your account to the statutory maximum ($7,300 for family coverage). You remain HSA-eligible through the end of 2023, so you face no penalty.

Example 2: Same facts as Example 1, but you lose eligibility in mid-2023 when you enroll in Medicare. You must include $608.33 (or more, depending on earnings) in your 2023 taxable income and pay an additional $60.83 (or a little more on earnings) tax as a penalty.

The Distribution Opportunity

Don't forget that once you've funded your Health Savings Account, you can make tax-free withdrawals for qualified expenses for the rest of your life. You don't have to remain HSA-eligible to make tax-free distributions. Thus, even if you buy a non-HSA-qualified emergency medical travel plan and your trip includes the first day of the month, you can reimburse qualified expenses tax-free.

And don't forget that you can always reimburse tax-free transportation expenses for qualified medical care, whether you self-insure (and thus are responsible for all transportation and subsequent medical costs) or your qualified expenses are applied to a deductible under either your medical plan or your emergency medical travel policy. Thus, if you don't buy coverage and are saddled with a $12,000 medical-helicopter charge, you can reimburse that expense tax-free from your Health Savings Account.

The Bottom Line

Like many situations involving Health Savings Accounts, you must be aware of two things:

  1. What are the rules?
  2. How can you leverage the rules to remain in compliance with all rules and still derive maximum value from our Health Savings Account?

Otherwise, you risk falling out of compliance with federal tax law.

#HSAMondayMythbuster #HSAWednesdayWisdom #HSA #HealthSavingsAccount #TaxPerfect #ECFC #yourHSAcademy #yourHealthSavingsAcademy

William G. (Bill) Stuart

Nationally recognized expert on reimbursement account strategy and compliance, particularly Health Savings Accounts and ICHRAs 🔹Writer🔹Author🔹Speaker🔹Educator🔹Strategist

2y

We don't typically consider implications on Health Savings Account eligibility when we purchase emergency medical travel coverage. But we should, because these policies may - or may not, depending on timing - affect our contribution limits for the year.

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