Q&A Health Savings Accounts (HSAs)

October 28, 2008

An individual is covered by an HDHP for 2008. He also covers his dependent children under his HDHP. His wife also covers the dependent children under her health plan that is not HDHP, but not the husband. Is husband eligible to contribute at the higher family coverage level if his dependents are covered by a health plan that is not an HDHP?

Yes.  Under IRS Notice 2008-59, as long as the eligible individual is not covered by his or her spouse’s health plan that is not a high deductible health plan, that individual would be eligible to make HSA contributions. Since the dependents are not eligible to make HSA contribution, it does not matter if any dependent is covered by a health plan that is not a HDHP. If an employee has family coverage, the dependents can be covered by another Plan that is not a high deductible.

When an employer sponsors an HSAS program, what responsibilities to the employees have under the program?

When an employer sponsors in an HSA program, the responsibility for administering the account is transferred to the employee. It is the employee who decides:

  • Whether he or she is eligible to make contributions to an HSA;
  • The amount of the eligible contribution to the HSA for any calendar year;
  • The withdrawal of any excess contributions;
  • How funds in his or her HSA will be spent; and
  • Whether the distributions are taxable or nontaxable.

Once can employee makes contributions are made an HSA, can an employer ever forfeit them?

No. Once HSA contributions are made to the HSA trust or custodial account, Code Section 223(d)(1)(E) provides that the eligible individual’s HSA balance is nonforfeitable at all times.  This means that once contributions are made, the eligible individual‘s HSA trust or custodial account cannot be subject to a vesting schedule or returned to the employer once the employee terminates employment.

If an employee’s spouse participates in a “general purpose” Health Flexible Spending Account (Health FSA) during the year and the spouse can be reimbursed for the employee’s expenses, will that right make the employee ineligible to participate in a HSA?

Yes, even if the spouse never submits a claim for reimbursement the employee’s expenses under the Health FSA. Under Revenue Ruling 2004-45, and IRS Notice 2005-86, a general purposes Health FSA is not considered a High Deductible Health Plan and therefore would make any participating or receiving reimbursements ineligible to participating in an HSA.

If an employer adopts a High Deductible Health Plan (HDHP) during the year, may an employee elect to terminate participation in a Health Flexible Spending Account  (Health FSA)?

No, a change in cost or coverage is not an allowable reason to change an election during the year for Health FSAs, as provided in Treasury Regulations Section 1.125-4.

Can an employee participate in a Health Flexible Spending Account (Health FSA) or a Health Reimbursement Arrangement (HRA) the same month and still be eligible?

In Revenue Ruling 2004-45, the IRS provides that an employee cannot participate in both a health FSA, HRA and HSA in the same month, unless the employee’s situation is one of the following:

  • The employee’s expenses reimbursed under a Health FSA and/or an HRA are limited to dental, vision and/or preventive care benefits (“Limited Purpose Health FSA or HRA”).
  • If an employee suspends participation in an HRA for the year (“Suspended HRA”).
  • Health FSA or HRA pays expenses above the deductible of the HDHP (“Post-Deductible Health FSA or HRA”).
  • HRA pays or reimburses the employee’s expenses incurred after the employee retires (“Retirement HRA”).

Can an employer place any restrictions on their employee’s ability to take distributions from his or her HSA?

No. An employer or an HSA trustee or custodian cannot place any restrictions on withdrawals.  Under IRS Notice 2004-50, Q/A-79, an HSA trustee or custodian can place reasonable restrictions on both frequency and the minimum amount from an HSA.  A trustee or custodian can prohibit distributions for amounts of less than $50 or only allow a certain number of distributions per month.

Under IRS Notice 2004-50, Q/A-79, an HSA trust or custodial agreement cannot restrict the account holder’s ability to rollover or transfer an amount from that HSA.

HSA trustees or custodians or employers are not permitted to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs must make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.

Must an individual participate in a High Deductible Health Plan (HDHP) for the entire calendar year to contribute the full amount to his or her HSA?

No. Under Code § 223(b)(8), if an individual is covered by a High Deductible Health Plan on December 1 of any calendar year, he or she may deduct the full contribution amount  for the HSA for the calendar year if he or she remains covered under an HDHP for the “testing period.”

The “testing period “is the period beginning with the last month of the taxable year and ending on the last day of 12th month following such month.

An employer sponsors an HSA program for its employees and requires employees to establish their HSAs at a particular financial institution.  Once contributions are made to the HSA, the employee directs contributions to be transferred to another institution.  Can an employer limit the employees’ ability to transfer?

No, once contributions are made to an employee’s HSA, they are owned by the employee and he or she has complete freedom to transfer funds, as provided in IRS Notice 2004-50.

May participants transfer their Health Flexible Spending Account (Health FSA) or Health Reimbursement Arrangement (HRA) balances to an HSA?

Yes, an individual must meet the following requirements, as provided in Code Section 106(e); and IRS Notice 2007-22:

  • The employer amends the plan effective by the last day of the plan year to allow such transfers;
  • No transfer has not previously been made for that employee with respect to that Health FSA or HRA;
  • The employee has High Deductible Health Plan (HDHP) coverage as of the first day of the month during with the transfer occurs, and is otherwise an eligible individual;
  • The employee elects by the last day of the plan year to have the employer make the transfer;
  • The Health FSA or HRA makes no reimbursements to the employee after the last day of the plan year;
  • The employer makes the transfer directly to the HSA trustee or custodian by the fifteenth day of the third calendar month following the end of the plan year, but after the employee becomes HSA eligible;
  • The transfer does not exceed the lesser of the balance of the Health FSA or HRA on September 21, 2006 or the balance on the date of the distribution; and
  • Either after the transfer there is a zero balance in the Health FSA or HRA and the employee is no longer a participant in any non-HSA compatible health plan, or on or before the first day of the transfer, the general purpose Health FSA or HRA is converted to a limited purposed Health FSA or HRA for all participants

Can an individual transfer his or her IRA balances to a HSA?

Yes, but an individual must meet the following requirements, as provided in Code Section 408(d)(9):

  • An individual may make a one-time contribution to a HSA of an amount distributed from his or her IRA during his lifetime;
  • The contribution must be made in a direct trustee-to trustee transfer;
  • The maximum amount that can be contributed to an HSA as a qualified HSA funding distribution is the maximum deductible contribution to the HSA computed on the basis of the type of coverage under the HDHP;
  • The individual must be covered by an HDHP during a testing period. The testing period begins with the month in which the transfer is made to the HSA and ends on the last day of the 12th month following such month.

Who has to correct the HSA if either the employer or the employee over contributes to the employee’s HSA?

It is the employee’s responsibility.

What the advantages of participating in HSAs?

Every month, new studies indicate that more and more employers are adopting high deductible health plans (HDHP) with Health Savings Accounts (HSAs). This adoption brings many advantages to both the employer and employee. These advantages include:

  • Lowering of health care premiums under the HDHP for coverage for employees;
  • Lowering the employer’s administrative costs;
  • Providing employees an opportunity to contribute for future health care expenses under the HSA for him or herself and his or her dependents;
  • Providing any employee who contributes to an HSA with a tax deduction and/or an income tax and payroll tax free contribution;
  • No monies in employees’ HSAs can ever be forfeited back to the employer, even if contributions are deemed in excess;
  • Providing an employer with an opportunity to contribute to eligible employees at any time and at any amount up to statutory limits;
  • Giving employees immediate access to their HSAs for any reason;
  • Providing for tax free distributions at any time for health care expenses incurred after the HSA has be established if the expense was neither reimbursed from any other source or deducted by the employee;
  • Providing for reimbursement of health care expenses for his or her spouse after the employee’s death, provided the spouse is named as the beneficiary under the HSA;
  • Providing either a trust or custodial account that accumulates earnings on a tax free basis;
  • Getting the employer out of the business of substantiating health care claims;
  • Avoiding the requirements of ERISA (and COBRA and HIPAA) if the employer does not make participation in the HSA mandatory; and
  • Giving the employees who participate in an HSA complete portability in transferring their accounts at any time.