Health savings accounts (HSAs) have grown in popularity in recent years for a variety of reasons. Many employers are looking to cut employee benefit costs due to the rapid and seemingly never ending increasing cost of healthcare, while others are looking to avoid the ACA’s hefty Cadillac Tax (an ACA-related 40% tax, set to go into effect in 2020 which impacts “rich” health coverage that exceeds predetermined threshold amounts).
High deductible health plans (HDHPs) allow both employers and employees to save on premiums and are a simple way to accomplish both goals. They also fit with a growing trend towards consumer-driven healthcare. Most importantly, as HDHPs become more prevalent, so do HSAs as they go hand-in-hand.
Enrollment in HSAs has exploded in the past decade, growing from 3.2 million people in 2006 to 20.2 million in 2016 and once the data is in for 2017, this number is expected to be even higher. Even with all their pros and cons, it appears that HDHPs with HSAs are here to stay as more and more companies make the transition to less expensive health insurance options.
HSAs may be a good deal for businesses and workers alike, but it’s important for employers to be informed of HSA regulations so they can ensure the HSA they offer is compliant with federal law. Here are four common mistakes employers make when offering an HSA.
Employers are only allowed to offer an HSA when it’s set up in conjunction with a qualified high deductible health plan. Note that this doesn’t simply mean a health insurance plan with a high deductible — many comprehensive plans are now being built to have higher deductibles so they can boast lower premiums, which is another common money saving strategy among employers these days. Rather, the term “High Deductible Health Plan” is specific to health insurance plans that not only have high deductibles, but also conform to other established federal guidelines.
For starters, HDHPs must meet specified minimum and maximum deductibles and out-of-pocket costs, which are set annually by the Internal Revenue Service (IRS). In 2017, HDHPs must have minimum deductibles of at least $1,300 for an individual and $2,600 for a family. Maximum deductibles, on the other hand, cannot exceed $6,550 for an individual and $13,100 for a family.
Second, like any other ACA-compliant plan, a true HDHP must provide preventative care benefits without a copay or deductible. Examples of preventative care benefits include annual physicals, age-appropriate screenings (like mammograms and colonoscopies), recommended immunizations for both children and adults, prenatal visits, as well as tobacco cessation and weight loss programs, just to name a few.
Setting up an HSA with a high deductible health plan that doesn’t meet these criteria is against the law. Although it may not happen right off the bat, the IRS will eventually catch the error and will happily charge you backdated fees, as well as interest on said fees. The best way to ensure compliance with this HSA regulation is having a knowledgeable employee benefits broker in your corner. They’ll make sure this doesn’t happen to you.
The IRS is very clear about HSA regulations. To qualify for an HSA, an employee must be enrolled in an official HDHP, and cannot be enrolled in Medicare or be receiving benefits from any other type of health coverage (such as through a spouse’s employer-sponsored health insurance plan). Additionally, the employee can’t be claimed as a dependent by someone else on a tax return in the current year.
In some cases, employers run across some speed bumps during the transition from a more traditional type of health insurance plan (perhaps even with a flexible spending account) to the HDHP-HSA combo. Until the employee’s insurance enrollment meets the specific criteria laid out by the IRS, neither employer nor employee can make contributions to an HSA.
If you work with health insurance plans long enough, it all starts to look like alphabet soup. HSAs, HRAs, and FSAs all sound similar enough, so it’s easy to overlook their nuances. Further complicating the ease at which these plans are confused, they are all eligible for use to pay for primarily the same expenses. However, there are important distinctions between each type of savings plans and it’s important to keep these acronyms straight. Misinterpreting the rules for participation in each type of plan can result in penalties and fees.
Many employees have become accustomed to using flexible spending accounts (FSAs) over the years as a method of using pretax dollars to pay for healthcare-related items. Companies that continue to offer traditional health insurance plans (even in parallel with an HDHP plan option) are allowed to offer their employees an FSA, and dependent care FSAs can be used with any plan, even an HDHP.
That said, participating in a general purpose medical FSA is prohibited if the insured switches coverage to an HDHP. To confuse matters even further, a newer type of medical spending account, called a “Limited Purpose FSA” (LPFSA) is now available to HDHP with HSA plan participants. LPFSAs are typically reserved for paying dental and vision costs for an enrollee, their spouse, and their eligible dependents, leaving HSA funds for regular, qualifying medical expenses.
Unlike an HSA, unspent FSA funds (even for LPFSAs) can’t be rolled over, except in rare cases where it’s been set-up to allow up to $500 in unused funds to carry over to the following year. This is the famous “use it or lose it” downfall to FSAs, though the jury is still out on whether a rollover account like an HSA or a “use it or lose it” account like an FSA or HRA actually promotes better medical care of one’s self. If you’re introducing an LPFSA for the first time, make sure your employees know it’s limits so they don’t overfund it.
It’s very likely that a portion of your workforce will have questions about or be confused by HSAs and FSAs. When explaining the differences to your employees, the most important point to highlight is the type of insurance plan to which the savings account can be linked. Remember: HSAs can only be used in conjunction with an HDHP, dependent care FSAs can be used independent of any health insurance plan, and healthcare FSAs cannot be used with HDHPs unless they are designed to be limited purpose. Make sure to give employees written documentation of the health insurance options and corresponding medical savings plans so they can review the information later with a spouse.
Employers are permitted to contribute to an employee’s HSA, but just as the employee is bound by maximum contribution limits set by the IRS, so is the employer. For 2017, these limits are as follows:
It’s important to remember that these contribution limits are ironclad, whether the employee contributes alone or the employer and employee both contribute. The employer is likely to set a static amount, but employees may choose to change their amount according to extra cash influx or anticipation of upcoming expenses. In some cases, this leads to excess contributions, which are not only exempt from tax-advantaged status, but are also subject to a penalty of a six percent excise tax.
Fortunately, there’s a way to fix an excess contribution and avoid the penalty. Because employer contributions take precedence over employee overfunding, employers can request return of funds exceeding the contribution limit from the employee by December 31 of the year in which the excess funds were contributed. Excess funds that can’t be recovered must be reported as income on the employee’s W-2, but it’s important to ensure the employee reports it correctly, using Form 8889.
As with all other government written legislation, HSA regulations are subject to change every year when Congress reviews budgets and mandates for the following year. In fact, HSA regulations have changed nearly every year in the recent past. Of course, this means every business owner offering these health insurance plans needs to make sure their HDHP with HSA is up-to-date during every single open enrollment period.
This annual review could prove to be quite time consuming for even the most robust human resources departments (and we know that most HR departments are hardly what anyone would consider “robust”!). The publications released by the IRS (and every other government body) are lengthy and complicated, which can be frustrating — not to mention the confusion caused when sifting through the legalese with which said documents are written.
These possible (even probable) annual amendments, difficult language issues, and substantial time commitment are big reasons to have a reliable employee benefits broker at your disposal. The fees and penalties some have incurred can be catastrophic, which is why it’s critical for business owners to have a good broker, lest they be found non-compliant.
How is your business ensuring compliance with HSA regulations? Leave us a comment below or contact us. We’d love to hear from you!