Thank You for Your Military Service. Now, about Your HSA Eligibility . . .

Veterans are entitled to certain lifelong medical benefits from the federal government. Those benefits may affect their eligibility to open and fund a Health Savings Account, however.

We - particularly the large majority of Americans who have never served in the armed forces - owe a debt of gratitude for those willing to lay down their lives for our country. Yet several rules around Health Savings Accounts prohibit some veterans from enjoying the same tax and asset-accumulation benefits that the rest of us who meet eligibility requirements enjoy.

It's time to correct this injustice. But first, let's examine the issue.

Health Savings Accounts and TRICARE

TRICARE is the medical coverage for active military and some retirees. For retirees, it's often a valuable asset - secondary coverage that inexpensive and comprehensive. The coverage remains in place if they continue to pay their low premiums. They rarely receive benefits from their TRICARE coverage, except perhaps when they're between full-time positions and need to cover a gap in employer-sponsored coverage.

Many of these eligible to retain TRICARE retire in their 40s to early 50s after military careers of 20 to 30 years. They then move to the civilian work force for the remainder of their working lives. They typically enroll in their employer-sponsored coverage. They may choose an HSA-qualified plan because it's only plan or the least expensive option that their employer offers.

Here's the problem: Even if they meet other requirements to open and fund a Health Savings Account, they can't do so. TRICARE doesn't offer an HSA-qualified plan. Thus, they're covered by two medical plans, and not all of them are HSA-qualified. Thus, they're disqualified from opening and funding a Health Savings Account.

They are treated differently from their co-workers who aren't veterans enrolled in TRICARE. Their fellow employees can fund their Health Savings Accounts with pre-tax payroll deductions. And their co-workers can receive an employer contribution to offset a portion of their deductible expenses. But TRICARE enrollees - even if they don't access TRICARE benefits during that year - can neither fund nor accept employer contributions.

Health Savings Accounts and VA Care

The Department of Veterans Affairs runs the largest medical system in the country, with hospitals and clinics located throughout the country. Military veterans entitled to care through this system (commonly called the VA in recognition of the departments pre-Cabinet name, the Veterans Administration) receive care at little or no cost. Many healthy veterans who embark on a career after the military enroll in employer-sponsored coverage and access little or no care through the VA.

The VA system itself doesn't provide coverage (insurance), so a veteran who can receive care through the system isn't disqualified from opening and funding a Health Savings Account. The eligibility issue arises when the veteran receives care through the VA.

Here's the rule: Veterans who are otherwise HSA-eligible can continue to fund their accounts (and receive employer contributions) if they don't access care through the VA or they access services that are either (1) select preventive care that can be covered in full on an HSA-qualified plan or (2) directly related to a service disability.

Example 1: Samantha goes to the VA for her annual physical and mammogram. These services fall under the definition of select preventive care and aren't disqualifying.

Example 2: Enrico lost his right leg below the knee when an IED exploded under his Jeep during his second tour in Iraq. He recently went to the VA for a replacement prosthetic. This care is related to a service disability and thus isn't disqualifying.

If a veteran receives care for any other medical injury, illness, or condition, she is disqualified from funding a Health Savings Account for three months following the end of that treatment.

Example 3: Janelle goes to her local VA hospital for surgery to repair a knee that she injured during a Tough Mudder competition. Because this service isn't preventive care not related to a service disability, Janelle is disqualified for three months.

A Back-Door to Full Contributions

In our example above, is Janelle limited to depositing no more than 9/12 of the statutory maximum contribution in 2023? Maybe. Or maybe not.

If Janelle wants to contribute more than the prorated maximum, she may be able to leverage the Last-Month Rule. This rule states that anyone who is HSA-eligible as of Dec. 1 can contribute up to the full statutory maximum for that year as long as she remains HSA-eligible through the end of the testing period, which extends through the end of the following calendar year.

So, the answer to the question hinges on when Janelle has the surgery.

Example 4: Janelle (Example 3 above) underwent her surgery in early June and had follow-up care, including surgeon visits and outpatient physical therapy, through the VA through mid-August. She lost her eligibility to fund her Health Savings Account for September, October, and November - three months after completing her VA care. She is HSA-eligible again Dec. 1. Thus, she can fully fund her Health Savings Account for 2023.

Example 5: Janelle has the same course of treatment, but it starts in August and ends in October. Because she's not eligible for November, December, or January of the following year, she can't apply the Last-Month Rule. She can contribute only 8/12 (January through August) of the maximum in 2023. . . If she's HSA-eligible Dec. 1, 2024, she can make a full 2024 contribution. Otherwise, she'll lose the opportunity to contribute for January 2024.

The important take-away: VA care may be convenient and inexpensive medical care. It often results in temporary disqualification from opening and funding a Health Savings Account, however. But if the veteran understands eligibility rules and can schedule a service without affecting her health so that she's HSA-eligible Dec. 1, she can fully fund her account that year.

Legislative Fix

Health Savings Account industry leaders are working with several senators to introduce a bill that would fix this Health Savings Account eligibility issue (and others related to Medicare and Indian Health Services). The bill allows veterans who are otherwise HSA-eligible to participate fully in a Health Savings Account program as they remain enrolled in TRICARE as secondary coverage or receive care at a VA facility.

The Bottom Line

It's time to thank military veterans for their willingness to sacrifice their lives in service of our freedom and ideals by not creating barriers to their opening and funding a Health Savings Account when meet all eligibility requirements but take advantage of the veteran's benefits that they've earned. The sooner, the better.

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