Which voluntary products disqualify HSA eligibility?

Last month, we discussed the newly proposed federal regulations surrounding hospital indemnity, critical illness and accident products.

Also see: How to avoid the approaching voluntary product thunderstorm

While these regulations will govern overall product compliance, enrollment in these products can also impact the ability of an individual enrolled in a qualified high-deductible health plan to contribute to a health savings account. While, the rules governing HSA eligibility are not new, have you discovered that it’s not always easy to determine which voluntary products disqualify an individual from contributing to an HSA?

One challenge is that while IRS Publication 969 provides a listing of the “additional insurance” an HSA- eligible individual may purchase, the language is not descriptive:

You can have additional insurance that provides benefits only for the following items:
· Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property.

· A specific disease or illness.

· A fixed amount per day (or other period) of hospitalization.

You can also have coverage (whether provided through insurance or otherwise) for the following items:
· Accidents

· Disability

· Dental care

· Vision care

· Long-term care

Moreover, employers, from time to time, may encounter conflicting advice on this topic from their advisers and the underlying insurer.

Ultimately, the question of HSA eligibility is a tax issue. Thus, I asked my CBIZ colleague William Smith, Esquire, from our national tax office to shed light on this key topic.

Question: Bill, we saw in the government’s June 10, 2016 proposed regulations that hospital indemnity and disease-specific products that do not provide a flat per-day benefit or a flat benefit per a defined time period may become noncompliant in 2017. In the meantime, if an individual is enrolled in a hospital indemnity, critical illness or cancer product that pays differing benefits for differing services (e.g., $500 for a day of hospital confinement, $300 for a day of outpatient surgery, and $150 for an MRI), does this enrollment disqualify the individual from contributing to an HSA?

William Smith: While the proposed regulations address provisions of the Internal Revenue Code (“Code”) governing group health plans, the HSA rules are found in a different chapter of the Code. Under both provisions, however, the statutory language is the same: “Insurance for a specified disease or illness,” and “Insurance paying a fixed amount per day (or other period) of hospitalization.”

The plan described above does not address a specific disease or illness, so to qualify, it would have to be eligible under the hospital coverage. The proposed regulations address the “non-coordinated excepted benefit” under the group health plan rules and state that the government has “become aware of hospital indemnity or other fixed indemnity insurance policies that provide benefits for doctors’ visits at a fixed amount per visit, for prescription drugs at a fixed amount per drug, or for certain services at a fixed amount per day — but in amounts that vary by the type of service. These types of policies do not meet the condition that benefits be provided on a per day (or per other time period, such as per week) basis. Accordingly, the proposed regulations clarify this standard by stating that the amount of benefits provided must be determined without regard to the type of items or services received.”

An example in the proposed regulations states that an employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits for doctors’ visits at $50 per visit, hospitalization at $100 per day, various surgical procedures at different dollar rates per procedure, and prescription drugs at $15 per prescription. The regulations conclude that for the doctors’ visits, surgery and prescription drugs, payment is not made on a per-period basis but instead is based on whether a procedure or item is provided, such as whether an individual has surgery or a doctor visit or is prescribed a drug, and the amount of payment varies based on the type of procedure or item. Because benefits related to office visits, surgery and prescription drugs are not paid based on a fixed dollar amount per day (or per other time period, such as per week), as required, the policy is not hospital indemnity or other fixed indemnity insurance that is an excepted benefit.

Because the HSA language is exactly the same as the excepted benefit language, the proposed coverage would not be considered “permitted coverage” under the definition of an individual eligible to contribute to an HSA, and therefore it would be disqualifying coverage.

Q: IRS Publication 969 states that individuals may purchase coverage for “accidents” without disqualifying HSA eligibility. Nowadays, many products marketed as accident policies contain more features and benefits than traditional accidental death and dismemberment polices. How does the IRS define “accident coverage”? If the coverage, for example, pays differing benefits for differing medical services, does it still qualify as “accident coverage”?

Smith: To my knowledge, the IRS has not specifically defined “accidents” in this context. It has said, “In addition to permitted insurance, an individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. If a plan that is intended to be an HDHP is one in which substantially all of the coverage of the plan is through permitted insurance or other coverage as described in this answer, it is not an HDHP.”

My interpretation is that the coverage for “accidents” is not limited in the same way that “insurance paying a fixed amount per day (or other period) of hospitalization” is limited as discussed above. As a result, I think that coverage for accidents that pays differing amounts for medical services would still qualify.

Q: If the insurance company issuing the voluntary product advises the employer that enrollment in the product does not disqualify HSA eligibility, may the employer and its employees rely on this advice?

Smith: The IRS will not be bound by representations made by private insurers. That being said, if the insurer makes an inaccurate representation that damages the policyholder, the policyholder may have recourse through normal legal channels. That will be an issue between insurer and insured, however, and the IRS will not be involved.

Q: Ultimately, who is responsible for determining if an individual is eligible to contribute to an HSA?

Smith: Ultimately it is the insured, as the IRS will deny the tax deductions the individual has claimed for contributions to the ineligible HSA. As above, the insured may have recourse against his employer or the insurer or any third party making representations upon which the insured justifiably relied, but that will not affect the actions of the IRS regarding the insured.

Q: Are there additional best practices employers should consider when communicating to their employees regarding HSA eligibility?

Smith: If they have any concerns, they should make sure their communications are reviewed by benefits counsel. Also, obtain appropriate advice on whether any disclaimers should be added to employee communications. Every company wants to get the right answers for its employees and present the information in an understandable format, but sometimes the desire to help needs to be tempered by a modicum of self-preservation.