Implementing an HSA with HDHP: How Hard Could it Be?

High-deductible health plans (HDHPs) with a Health Savings Account (HSA) feature are growing in popularity. While implementing an HDHP/HSA arrangement can be complicated, having a sense of the landscape can prevent uncomfortable bumps and bruises. This post explores some of the general eligibility questions we are asked most frequently. It is the first in a series on HDHP/HSA arrangements, and we hope that together these posts will provide a useful overview on implementing an HDHP/HSA arrangement.

1. Can an employer offer a health flexible spending account (FSA) to employees not enrolled in the HDHP and a dependent care assistance plan (DCAP) to all employees, and are there any problems with this? There are no problems with offering a DCAP to all employees. There are no problems with offering a health FSA or health reimbursement account (HRA) to those employees not participating in the HDHP/HSA. There may, however, be minor issues in the first year of HSA coverage for those employees who previously were covered by a health FSA or HRA, and there are also issues for employees whose spouses are covered under a health FSA or HRA.

Specifically, an individual who is covered by general-purpose health FSA or HRA is not eligible to make or receive HSA contributions for the entire period of the health FSA or HRA coverage, even if the individual has exhausted his or her health FSA or HRA account balance. If the individual’s health FSA has a grace period, the grace period will not make the individual ineligible for HSA contributions as long as the individual has a $0 balance at the end of the plan year associated with the grace period. (A grace period allows participants to receive reimbursement for claims incurred up to 2½ months after the end of the plan year and is different than a plan’s claims run-out period or timeline for submitting claims after the plan year ends.)

In addition, an individual will not be eligible for HSA contributions if his or her qualified medical expenses can be paid or reimbursed under his or her spouse’s health FSA or HRA. Importantly, the burden of determining HSA eligibility falls almost entirely on the employee – employers that contribute to an employee’s HSA are only responsible for determining the following: (1) whether the employee is covered under an HDHP or any low-deductible health plan (including health FSAs and HRAs) sponsored by that employer, and (2) the employee’s age (for catch-up contributions).

There are alternatives for dealing with this health FSA/HRA coverage issue, such as amending the health FSA or HRA to cover only limited expenses (such as dental, vision, and/or preventive care expenses); this is known as a “limited purpose” health FSA or HRA and is considered HSA compatible.

2. If an employer has a non-calendar year health insurance renewal (or plan year) with a health FSA that runs on a calendar year basis, what happens for those employees who elect a health FSA for the calendar year if they elect the HDHP with the HSA effective on the renewal date? Suppose an employer operates its group health plan on an October 1 to September 30 plan year, corresponding to the health insurance policy year. An employee cannot be covered by a health FSA and receive or make contributions to an HSA. An employee is not eligible to contribute (or receive employer contributions) to an HSA until the health FSA year has ended. For a health FSA without a grace period, an employee switching from health FSA to HSA coverage would not be able to contribute (or receive employer contributions) to the HSA until January 1, even though the plan year begins on October 1, and even if the employee’s FSA balance is $0. The rules are different if the health FSA has a grace period – if the employee had not exhausted his or her health FSA account by December 31, the employee would not be able to contribute (or receive employer contributions) to the HSA until the end of the grace period.

3. Can employees age 65 or older contribute to an HSA? Employees age 65 or older can contribute to an HSA (and receive an employer contribution) as long as the employee is not receiving Medicare or Social Security benefits. The determination is based solely on receipt of Medicare/Social Security benefits, not the employee’s age.

4. Suppose an active employee who is contributing to an HSA turns 65, thereby becoming Medicare eligible and experiencing a qualifying event. Must that employee be allowed to enroll in the non-HDHP medical plan options (PPO, HMO, etc.), and/or be provided with the option to continue participation in the HDHP without receiving employee or employer HSA contributions? First, it is actual enrollmentin Medicare Part A or Part B, not eligibility to enroll, that entitles a participant to an election change, and that change can only be to reduce or cancel a health coverage election (the so-called consistency rule). Second, employer and employee HSA contributions are permitted for an employee who is eligible for but not enrolled in Social Security/Medicare. Thus, an active employee participating in an HDHP/HSA will only lose eligibility for HSA contributions if the employee enrolls in Social Security/Medicare benefits. Such an employee would still be eligible to participate in the HDHP or could choose to drop HDHP coverage or elect another option that qualifies as a reduction in coverage.

5. But isn’t Medicare Part A enrollment automatic? Enrollment in Medicare Part A is automatic for people receiving Social Security benefits; that is why an individual receiving Social Security benefits is not eligible for HSA contributions. On the other hand, an employee who is eligible to receive Social Security benefits but does not actually enroll to receive Social Security benefits remains eligible for HSA contributions.

6. May employer HSA contributions be limited to active employees? Yes, so long as the company does not make contributions to any class of former employee.