By: Marsh & McLennan Agency
More Than Meets the Eye: Seeing the Smaller Details of the HSA
Ann Marie Olszewski
Many employers, with plan years renewing on January 1, are currently in the thick of annual enrollment activity. According to Marsh & McLennan Agency’s 2017 Southeast Michigan Mid-Market Group Benefits Survey, 52 percent of employers surveyed offered a qualified high deductible health plan (HDHP) to employees, and about a quarter of all survey participants’ employees are enrolled for this type of coverage. A health savings account (HSA) is a complex and often confusing component of HDHP enrollment. Communicating the myriad details of the HSA to employees is always a challenge.
Employers typically provide information about the HSA’s annual contribution maximums and expenses eligible for reimbursement. They will usually relate the basic eligibility guidelines. But there are aspects of the HSA that are lesser known, yet likely to affect some account holders and their dependents. We will examine a few of those provisions here.
- It’s Not Just for Medical Expenses. It is common to think of the HSA only in terms of medical care, but it can also be used to pay for eligible dental, vision and hearing expenses not covered by another health plan. This means an employee can use HSA funds for a hearing aid or orthodontia treatment. It can also be used to pay for COBRA premiums if the employee’s health coverage terminates.
- HSA Contributions Made by Veterans. A veteran, eligible for Veterans Health Administration (VA) benefits, is unable to make HSA contributions if VA medical benefits for non-preventive care were received in the preceding three months. This rule was amended as of January 1, 2016. Veterans receiving VA benefits for service-related disabilities, who are otherwise eligible to make HSA contributions, may still make tax-deferred HSA contributions.
If you employ any veterans, you may want to point out this important exception to the HSA eligibility rules.
- Adult Children and HSA Eligibility. The Affordable Care Act allows children to remain covered on a parent’s medical plan through age 26. However, the IRS did not change the definition of an eligible dependent for purposes of the HSA. The child must be the parent’s tax dependent and under age 19, or under age 24 if a full-time student, in order to have expenses paid by the employee’s HSA.
A child who is not the employee’s tax dependent, but is covered by the employee’s HDHP, may be able to open an HSA of his or her own. Interestingly, the child is not limited by the annual HSA contribution for single HDHP coverage. The child may actually contribute up to the amount permitted for family HDHP coverage, because the child is enrolled in a family contract (i.e., at least two members). The employee may also contribute the amount allowed for family HDHP coverage to his or her own HSA.
You may have several employees covering adult children in an HDHP. It would be helpful to remind them that children who are not tax dependents cannot use the employee’s HSA to pay for their expenses. These children should instead consider opening their own accounts.
- Mid-Year HDHP Enrollment, Coverage Tier Changes, and the Full Contribution Rule. Eligibility to make HSA contributions is determined on a month-by-month basis. You may have new hires enrolling in the HDHP mid-year, or switching from single to family coverage following a status change like marriage. However, this does not mean their total HSA contribution must be pro-rated based on the number of months they were actually eligible to fund the account. In such cases, the employee may make the “full contribution” permitted for the calendar year.
An employee who takes advantage of the Full Contribution Rule is essentially being permitted to overfund the HSA, based on his or her actual monthly eligibility. However, there is one thing the employee must do to avoid being penalized for this later: the employee must remain eligible to continue making HSA contributions during all 12 months of the following calendar year. This does not mean the employee must keep funding the HSA, only that he or she remains eligible to do so during the “testing period” (i.e., stay enrolled in a qualified HDHP, and not be enrolled for other non-qualifying health coverage). Otherwise, any contributions from the prior year, exceeding the amount based on the employee’s actual monthly eligibility, will be treated as income and subject to a 10 percent tax penalty.
Employees need a strong knowledge base in order to take full advantage of their HSAs. By bringing certain features of these accounts to employees’ attention, employers encourage increased awareness and engagement with a consumer-driven approach to health care.
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About Marsh & McLennan Agency – Marsh & McLennan Agency LLC, a subsidiary of Marsh, was established in 2008 to meet the needs of midsize businesses in the United States. MMA operates autonomously from Marsh to offer employee benefits, executive benefits, retirement, commercial property & casualty, and personal lines to clients across the United States.