For Flexible Spending Accounts and Health Reimbursement Accounts, eligibility rules vary from employer to employer but are normally easy to understand and ensure you qualify for the benefit.
For Health Savings Accounts, the IRS sets the eligibility rules. These basic rules are:
- You must be enrolled in a qualified high deductible health plan (HDHP). The criteria for a HDHP is set by the IRS and indexed annually.
- You cannot be claimed as anyone’s dependent.
- You cannot have any disqualifying coverage.
The first two rules are straightforward. However, the third rule is very easy to overlook and could inadvertently result in disqualification for an HSA account.
As a general rule, you cannot have any health coverage other than your HDHP. This includes all primary and secondary insurance plans including private healthcare, Medicare, Medicaid and Tri-care along with pre-tax reimbursement plans such as Flexible Spending Accounts (FSA), Medical Reimbursement Plans (MRP) and Health Reimbursement Arrangements (HRA).
Also, your spouse’s participation in any of these plan types will also make you ineligible for an HSA account. This can create timing issues for married couples with benefits that run on different plan years. If your spouse participates in a disqualifying plan (non-HDHP, FSA, HRA, MRP, etc.) running on a different plan year than your employer’s plan, you cannot contribute to an HSA account until your spouse’s coverage has ended.
Another timing issue relates to the FSA 2.5 month grace period. Many overlook this detail, but employees cannot contribute to an HSA until either their FSA account is empty or until their 2.5 month grace coverage has ended.
While there are plan designs that can allow you and your spouse to be enrolled in a portion of these benefits (post deductible, limited coverage, single coverage), unless you specifically enroll in one of these special benefit designs, you or your spouse’s enrollment in any of these benefit types will make you ineligible for an HSA account.
Many well intentioned employees find out at tax time that they have inadvertently become ineligible for their HSA account. Contributions made by an ineligible individual are subject to tax and may also be subject to penalties. This is always an unwelcomed surprise.
Unfortunately, most employers can only ensure their employees are enrolled in appropriate benefits sponsored by their company. It is nearly impossible to track other insurance coverage maintained outside the company. So while your employees may appear to qualify for pre-tax HSA contributions, their spouse’s elections or other secondary insurance may prove otherwise.
This may be especially challenging for Employers who wish to contribute to HSA accounts. How will you handle contributions for participants who are not eligible for an HSA account? How will you handle retrieving contributions for participants who thought they were eligible for an HSA account but at tax time find out they are not? FSAs and HRAs don’t have these complex eligibility requirements. Employers can rest easy knowing they can contribute equitably to all participants and employees can be assured that employee and employer contributions will remain tax-fee regardless of their family’s insurance selection.
Overall, most legal responsibilities fall to the employee to ensure they are HSA eligible each month they contribute to an HSA account. Merely hoping employees understand the plan’s requirements is not enough. Education is the key to a successful HSA plan. As such, HSA eligibility should be reviewed in detail with your employees and you should partner with an administrator who can advise and support employees through these complex situations.