I'm enrolled in an HSA-qualified Plan. Do I Have to Open an HSA? Hmm. . .

If you're enrolled in HSA-qualified coverage and meet other eligibility requirements, you can open and fund a Health Savings Account. But are you required to do so?

A broker recently asked me about an employee at one of his client companies. The firm offered an HSA-qualified medical plan as an option. One of the workers chose this coverage and also elected to participate in the company's general Health FSA program. The broker understands that coverage through a general Health FSA (the employee's, a spouse's, or a parent's) disqualifies that individual from opening and funding a Health Savings Account.

Thus, his question: Is a worker enrolled in HSA-qualified coverage barred under federal tax law from enrolling in her employer's general Health FSA? Let's examine this issue in the last 2022 edition of HSA Monday Mythbuster.

The Benefits of an HSA-qualified Plan

An HSA-qualified plan has the broadest deductible of any coverage. All non-preventive services must be subject to the deductible. And the federal government, not your state government, your insurer, or your employer can alter that list. In contrast, all other medical plans can cover any service in full or subject to cost-sharing (copays, deductible, or coinsurance).

The single biggest advantage to an HSA-qualified plan is that it's the one type of coverage that allows you to open and fund a Health Savings Account (if you meet all other eligibility requirements). This benefit can be worth several thousand dollars annually in tax savings.

A second benefit is low premium, due to the broad deductible. Cost-sharing is generally inversely proportional to premium. In other words, someone - either you the patient or the plan sponsor - must pay a bill for covered services. If you're responsible for a larger portion of your medical bills, the insurer is on the hook for less. That difference is reflected in the premium.

Federal Tax Law and Health Savings Accounts

Federal tax law does not require anyone eligible to open and fund a Health Savings Account to do so. All it does is set the requirements to become HSA-eligible, which are (as readers of this column have memorized):

1. Enroll in HSA-qualified coverage.
2. Not be covered by any disqualifying coverage.
3. Not qualify as another taxpayer's tax dependent.

But nowhere in the law is it stated that someone who meets these requirements must open a Health Savings Account, nor does federal tax law state that someone who is enrolled in HSA-qualified coverage is barred from enrolling in disqualifying coverage.

Reasons to XXXXXXX

There are situations in which it makes sense for someone enrolled in HSA-qualified coverage to also enroll or participate in disqualifying coverage. Here are some examples:

Working senior. Workers age 65 and older are required under federal rules to enroll in one or more Parts of Medicare if they receive Social Security or Railroad Retirement benefits (as more than half of all Americans do at their 65th birthday). Also, if they work at a company with fewer than 20 employees, their employer's insurer may require them to enroll in Medicare Part A and Part B as a condition of remaining on the group plan. This isn't a federal requirement, but Medicare rules make it advantageous to insurers to require enrollment in Medicare in this situation.

In this case, an employee who is already disqualified from opening and funding a Health Savings Account and projects spending on qualified out-of-pocket medical, dental, vision, and over-the-counter items can elect to participate in the company's general Health FSA program. It offers the same immediate tax benefits as a Health Savings Account, but without the flexibility to alter the annual election or the opportunity to accumulate balances over time.

Richer company benefit. Some companies offer an HSA-qualified plan because it has the lowest premium, then funnel premium savings into a Health Reimbursement Arrangement, or HRA, integrated with the medical plan. An HRA is an employer-sponsored, -designed, and -funded plan through which the company agrees to reimburse certain out-of-pocket expenses. An HRA is a notional account, which means that the employer doesn't fund each employee's account, but rather issues, in effect, an IOU, that the employee can cash in with covered cost-sharing. For example, the HRA may reimburse the final $3,500 of a $4,000 self-only deductible.

Employers may offer an HRA because it allows them to give employees more money toward their out-of-pocket expenses. Company contributions to a Health Savings Account are made in cash. In contrast, an HRA reimburse specific expenses. Since most employees incur only a portion of their HRA-covered out-of-pocket expenses, the employer usually actually pays only a portion of the promised benefit. It's not uncommon for a company that offers a $1,000 HRA to 10 employees (total potential liability of $10,000) to pay $4,000 or less in actual claims. The same $400 as a Health Savings Account contribution would cover only $400, not $1,000 as in the case of an HRA, of the out-of-pocket responsibility incurred by an employee with high claims.

In this case, the employee is already disqualified from funding a Health Savings Account, so enrolling in a general Health FSA would help with any remaining out-of-pocket qualified medical, dental, vision, or over-the-counter expenses.

Immediate need. An employee may choose to enroll in a general Health FSA and forfeit eligibility to fund a Health Savings Account due to uniform coverage. This term refers to a mandatory feature of Health FSAs that allow a participant to draw on her full annual election at any time during the plan year. For example, a worker with a $2,600 election who's enrolled in a calendar-year plan can draw on the full $2,600 to cover an inpatient stay in mid-January, even though she's had only $100 deducted from her biweekly paychecks to that point in the calendar year. This feature, not available with a Health Savings Account (though administrators and employers can design programs that roughly mimic it), adds a cash-flow benefit to the tax savings associated with a Health FSA.

If the immediate need is dental or vision and the company offers a Limited-Purpose Health FSA, the employee can fund a Health Savings Account and make an election to the Limited-Purpose Health FSA to draw the full election for an early-in-the-plan-year qualified dental or vision expenses. A Limited-Purpose Health FSA is designed specifically not to be disqualifying.

Ignorance. Health Savings Account rules are confusing, particularly to new enrollees. An employee may choose the HSA-qualified plan, then elect to participate in her company's general Health FSA program. Many companies have configured their enrollment systems to deny this enrollment or flag it for follow-up by a benefits professional. An employee who enrolls in an HSA-qualified plan and a general Health FSA is disqualified from opening or funding a Health Savings Account - including accepting an employer contribution - during the general Health FSA plan year. That's a high price to pay for what may be a mistake, since the better financial option may be to accept the employer contribution to the Health Savings Account and direct payroll deductions to that account as well. This path increases the funds available to the employee to reimburse qualified expenses (though without the cash-flow benefits of a Health FSA) and adds the flexibility of changing deductions during the year without a qualifying event, carrying over unlimited balances, and investing accumulated funds.

The Bottom Line

No, an individual enrolled in HSA-qualified coverage is not required to open and fund a Health Savings Account if eligible to do so, nor is she barred under federal law from participating in an employer's Health FSA program instead (though companies may impose this restriction). A Health Savings Account often is the best financial option. But not always.

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