FIS Relius
IRS Answers 88 HSA Questions 7/28/2004
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Official IRS pronouncements give strong evidence of the public interest in, and the complexity of, Health Savings Accounts (HSAs). Congress authorized HSAs in legislation President Bush signed in December 2003, and since then the IRS has issued two revenue rulings, one revenue procedure, and five separate notices addressing issues related to HSAs. HSAs combine consumer-driven health care with an intriguing tax-deferred savings vehicle.

The latest guidance, Notice 2004-50, addresses 88 separate questions relating to HSAs. Some of the answers merely apply existing guidance to a particular fact pattern. Others break new ground. Overall, the answers seem designed to encourage the creation of HSAs, and make them as accessible as possible within the statutory framework. Highlights of the Notice include:

  • Mere eligibility for Medicare will not disqualify a person from being an eligible individual (eligible to contribute to an HSA), provided he or she is not enrolled in Medicare Part A or Part B. Note that Medicare enrollment is automatic when a retiree applies for and begins receiving Social Security benefits.

  • Coverage under insurance for one specific illness, such as cancer or heart disease, will not disqualify a person from being an eligible individual. Neither will participation in wellness or employee assistance programs (provided those programs don’t provide significant medical treatment) or use of a discount card to reduce the price of medical benefits or prescription drugs.

  • A person is an eligible individual only if a High Deductible Health Plan (HDHP) covers him or her. An HDHP must provide that total out-of-pocket costs (for deductibles, co-pays, etc.) cannot exceed a specified limit. The Notice explains that reasonable benefit limitations will not be counted against the out-of-pocket costs. For example, it is reasonable to impose a policy limit on total benefits of $1 million, or to limit benefits to Usual, Customary, and Reasonable (UCR) charges. If a person must pay expenses in excess of UCR limits, those payments will not be treated as out-of-pocket costs which may disqualify an HDHP.

  • If there is clear and convincing evidence that an HSA distribution was mistaken, the owner can repay it prior to April 15 of the following year without penalty. However, the bank or other institution holding the HSA does not need to accept the repayment.

  • An HDHP can pay, before the deductible is satisfied, for medicines used to prevent an illness, but not for medicines used to treat an existing illness. For example, before the deductible is satisfied an HDHP can pay for cholesterol medication used to prevent a heart attack, but not for antibiotics to treat an existing ear infection.

  • Anyone can make HSA contributions for an eligible individual, including a state high-risk pool.

  • There is no time limit on when an HSA can make a tax-free distribution to pay a medical expense, provided the owner incurred the expense after establishing the HSA. For example, suppose Arthur sets up an HSA today and incurs an unreimbursed medical expense in 2005. Arthur could take a tax-free distribution in 2020 to pay that expense. However, Arthur would need to retain records to show the amount of the expense and that the expense was not otherwise reimbursed.

  • If an employer directly operates an HSA matching contribution requirement, or makes HSA contributions for employees who participate in company wellness programs, that will likely violate the HSA comparability requirement. However, because cafeteria plan payments are not subject to the comparability restrictions, an employer can operate a matching program or impose eligibility restrictions as part of a cafeteria plan.

  • An HSA’s payment of account administration charges is not a taxable distribution to the participant. However, such payments do not increase the contribution limit. Alternatively, an eligible individual can pay such charges directly (outside the HSA), without using up the contribution limit.