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Post-Deductible Specialty HRAs Preserve HSA Eligibility

Question: How can employers offer infertility and other specialtyHRAs without causing employees enrolled in the HDHP to lose HSA eligibility?

Short Answer: The most common strategy for preserving employees’ HSA eligibility is to offer a post-deductible HRA option for HDHP participants. Under this approach, the HRA will not cover any expenses incurred prior to the employee satisfying the statutory minimum HDHP deductible.

General Rule: HSA Eligibility
The general rule is that an individual must meet two requirements to be HSA-eligible (i.e.,to be eligible to make or eceive HSA contributions):

  1. Be covered by an HDHP; and
  2. Have no disqualifying coverage (generally any medical coverage that pays pre-deductible, including Medicare).

HSA eligibility also requires that the individual cannot be claimed as a tax dependent by someone else.

One of the key requirements for all HDHP coverage is that the plan impose at least the statutory minimum deductible prior to paying for covered services. In 2022, the HDHP minimum deductible is $1,400 for single coverage, and $2,800 for family coverage.

For more details on everything HDHP/HSA, see our 2022 Newfront Go All the Way With HSA Guide.

Specialty HRAs: An HSA Eligibility Concern
An HRA that is not specially designed as HSA-compatible is disqualifying coverage for any individual covered by the HRA because it provides medical coverage prior to satisfying the requisite minimum HDHP deductible.

This HSA eligibility issue has increasingly been a concern in recent years with the rise to prominence of specialty HRAs. These are HRAs designed to cover a specific type of health expense that typically is not adequately covered by the major medical plan. Common examples include specialty HRAs for infertility, gender dysphoria, mental health, autism, or executive physicals.

For more details, see:

Accordingly, employers sponsoring an HDHP need to take steps to ensure these supplemental offerings through a specialty HRA do not cause employees to lose HSA eligibility.

Preserving HSA Eligibility: Post-Deductible HRA

The most common approach to preserving HSA eligibility is to structure the specialty HRA as post-deductible for employees enrolled in the HDHP. Under this approach, the HRA will not cover (i.e., reimburse) any expenses incurred prior to the employee satisfying the statutory minimum HDHP deductible in expenses covered by the HDHP. In 2022, the minimum HDHP deductible is $1,400 for individual coverage and $2,800 for family coverage.

The IRS guidance provides a few key points about post-deductible HRAs for these purposes:

  • The HRA can cover benefits incurred after satisfying the statutory minimum HDHP deductible even if the employee’s specific HDHP coverage imposes a higher deductible.
  • The expenses must be covered by the employee’s HDHP to count toward the statutory minimum HDHP deductible. Expenses excluded by the HDHP do not count toward satisfying the deductible.
  • The expenses must be incurred after satisfying the deductible to qualify. Expenses incurred before the date the employee satisfies the statutory minimum HDHP deductible are not eligible—even if the employee submits the receipts for those expenses after satisfying the deductible.

A specialty HRA designed to provide post-deductible benefits for employees enrolled in the HDHP will typically require that the employee submit an EOB or other form of similar substantiating documentation to verify the date the employee has reached the minimum deductible.

Only expenses for services incurred after satisfying the minimum deductible are eligible for reimbursement. Expenses are considered incurred when the actual service is performed, not when the employee is billed, charged, or pays for the care.

Preserving HSA Eligibility: Excluding HDHP Participants from HRA Eligibility

Another common approach to preserving HSA eligibility is to structure the specialty HRA to exclude HDHP participants from eligibility for the HRA. Needless to say, the HRA cannot be disqualifying coverage if the employee is ineligible to participate.

In this situation, employers will inform employees at enrollment that they should choose a non-HDHP medical plan option if they want access to the specialty HRA coverage. Some employers prefer this approach to avoid the administrative burden and communication challenges associated with a post-deductible HRA offering.

Employers with a large population of HDHP participants in particular should at least consider the post-deductible HRA approach as a method of retaining a scaled-back HRA benefit for the employees enrolled in the HDHP.

Preserving HSA Eligibility: Telehealth Only (Temporary Relief)

Under the Consolidated Appropriations Act, 2022 (CAA 2022), which extended prior relief from the CARES Act, HDHPs and other coverage may offer first-dollar telehealth services for the months of April 2022 – December 2022 without causing participants to lose HSA eligibility. Those telehealth services do not need to be preventive or related to Covid-19 to qualify for the relief.

Therefore, through the end of calendar year 2022, specialty HRAs that exclusively provide telehealth will not affect employees’ HSA eligibility.

One major downside of this approach is that the relief is scheduled to sunset at the end of 2022. Unless the relief is extended, the employer would need to readjust plan design (e.g., to a post-deductible HRA approach) in 2023 to preserve employees’ HSA eligibility going forward.

Another major downside of this approach is that restricting the specialty HRA to telehealth services only will in many cases run counter to the purpose of the HRA. For example, a typical specialty HRA designed to cover infertility or gender dysphoria costs generally would not be viable if limited to telehealth. On the other hand, common specialty HRA services such as mental health and autism may be able to provide sufficient telehealth services to merit consideration.

Preserving HSA Eligibility: Preventive Expenses Only

A relatively uncommon approach to preserving HSA eligibility is to structure the specialty HRA to cover only preventive services. Under this approach, employees cannot reimburse any non-preventive expenses through the HRA.

This approach does not affect employees’ HSA eligibility because the main exception to the HDHP minimum deductible requirement is the ability of an HDHP to provide first-dollar coverage (i.e., not subject to the deductible) for preventive care without affecting HSA eligibility. Other forms of health coverage, including HRAs, can therefore also provide coverage for preventive services without the need to satisfy the deductible.

In addition to the list of standard HSA-related list of preventive services, the IRS has incorporated the ACA preventive health services mandate items into the HSA-related preventive care definition to ensure that HDHPs’ first-dollar coverage of the required ACA preventive services does not affect HSA-eligibility.

Furthermore, the IRS has recently expanded the list of first-dollar preventive services to include medical services and items to prevent exacerbation of a chronic condition, as well as medical items and services related to testing for and treatment of Covid-19

(Note: These preventive services can also be covered by a limited purpose health FSA or a combination limited purpose/post-deductible FSA without disqualifying the individual from HSA eligibility.)

However, the major downside to this preventive-only HRA approach is that despite the various forms and expansions of preventive services that qualify, restricting the specialty HRA in this way will in many cases run counter to the purpose of the HRA. For example, a typical specialty HRA designed to cover infertility, gender dysphoria, autism, or mental health costs may not offer any preventive services. In most cases it therefore would not make sense to limit these common types of benefits to a preventive-only HRA.

On the other hand, an executive physical HRA is an example of a specialty HRA that can be designed to take advantage of this approach without compromising its purpose.

Preserving HSA Eligibility: Dental/Vision Only

Another uncommon approach to preserving HSA eligibility is to structure the specialty HRA to cover only dental and vision expenses. Under this approach, employees cannot reimburse any standard medical expenses (i.e., unrelated to eyes or teeth) through the HRA.

This approach does not affect employees’ HSA eligibility because there is an exception to the HDHP minimum deductible requirement that offers the ability of an HDHP to provide first-dollar coverage (i.e., not subject to the deductible) for “permitted coverage” without affecting HSA eligibility. Permitted coverage includes dental care and vision care. Other forms of health coverage, including HRAs, can therefore also provide coverage for dental/vision services without the need to satisfy the deductible.

As with limiting the HRA to preventive expenses only, the major downside to this approach is that restricting the specialty HRA to dental/vision services only will in many cases run counter to the purpose of the HRA. For example, a typical specialty HRA designed to cover infertility, gender dysphoria, autism, or mental health costs may not offer any dental or vision services. The result is that in most cases it would not make sense to limit these common types of benefits to a dental/vision-only HRA.

On the other hand, an uncommon specialty HRA benefit such as one designed to cover laser eye surgery or orthodontia could take advantage of this approach without compromising its purpose.

Losing HSA Eligibility: Offering Disqualifying Coverage HRA to HDHP Participants

An alternative approach that would simply cause employees to simply lose HSA eligibility is to offer the standard specialty HRA as disqualifying coverage. Under this uncommon approach, any employee who failed to opt-out of the specialty HRA would be ineligible to make or receive HSA contributions.

This approach can create significant confusion and communications issues because employees generally understand the HDHP plan option as making them HSA-eligible. HDHP participants do not expect to simultaneously be eligible for an employer offering that provides disqualifying coverage. Employers need to take extraordinary efforts in this situation to communicate the relationship between the specialty HRA and the loss of HSA eligibility.

Employers considering this uncommon approach should be aware that the employer is responsible for monitoring whether the employee has any disqualifying coverage through that employer prior to allowing HSA contributions. Failure to exclude an HRA participant from making and receiving HSA contributions through payroll would therefore be the employer’s (as opposed to the individual’s) tax failure to correct.

Losing HSA Eligibility: Permitted Insurance Exception Inapplicable

The HSA eligibility rules also provide that “permitted insurance” does not cause individuals to lose HSA eligibility. “Permitted insurance” includes, among other items, insurance for a specified disease or illness. Employers that wanted to offer a fully insured policy for a specified disease or illness can therefore generally do so without affecting employees’ HSA eligibility.

However, a specialty HRA does not qualify as “permitted insurance.” IRS guidance confirms that any such benefit must be provided through insurance contracts and not on a self-insured basis. HRAs are self-insured and therefore do not meet the definition.

Summary
Employers offering specialty HRAs have many considerations to address in both the plan design and compliance areas. On the compliance side, a key consideration is to ensure that the specialty HRA does not affect HDHP participants’ ability to make and receive HSA contributions. The post-deductible HRA strategy is a common approach to permit employees to have their cake (HRA) and eat it too (HSA).

Relevant Cites
IRS Revenue Ruling 2004-45:
Post-Deductible Health FSA or HRA. A post-deductible health FSA or HRA that does not pay or reimburse any medical expense incurred before the minimum annual deductible under section 223(c)(2)(A)(i) is satisfied. The individual is an eligible individual for the purpose of making contributions to the HSA. The deductible for the HRA or health FSA (“other coverage”) need not be the same as the deductible for the HDHP, but in no event may the HDHP or other coverage provide benefits before the minimum annual deductible under section 223(c)(2)(A)(i) is satisfied...In addition, although the deductibles of the HDHP and the other coverage may be satisfied independently by separate expenses, no benefits may be paid before the minimum annual deductible under section 223(c)(2)(A)(i) has been satisfied.

IRS Notice 2005-86:
However, as described in Rev. Rul. 2004-45, 2004-1 C.B. 971, an individual who is otherwise eligible for an HSA may be covered under specific types of health FSAs and remain eligible to contribute to an HSA. One arrangement is a limited-purpose health FSA, which pays or reimburses expenses only for preventive care and "permitted coverage"(e.g., dental care and vision care). Another HSA-compatible arrangement is a post-deductible health FSA, which pays or reimburses preventive care and for other qualified medical expenses only if incurred after the minimum annual deductible for the HDHP under § 223(c)(2)(A) is satisfied. This means that qualified medical expenses incurred before the HDHP deductible is satisfied may not be reimbursed by a post-deductible HDHP even after the HDHP deductible had been satisfied. To summarize, an otherwise HSA eligible individual will remain eligible if covered under a limited-purpose health FSA or a post-deductible FSA, or a combination of both.

IRS Notice 2008-59:
Q-15. What medical expenses may be taken into account in determining when the HDHP deductible is satisfied for purposes of a post-deductible HRA or post-deductible health FSA?

A-15. Only medical expenses described in § 213(d) and covered by the HDHP may be taken into account in determining whether the HDHP deductible, or the minimum deductible in § 223(c)(2)(A)(i), has been satisfied. For example, if the HDHP does not cover chiropractic care, expenses incurred for chiropractic care do not count toward satisfying the HDHP deductible or the minimum deductible in § 223(c)(2)(A)(i). For self-only HDHP coverage, only the covered medical expenses of the covered individual count toward satisfying the HDHP deductible or the minimum deductible in §223(c)(2)(A)(i)(I).

Example. In 2008, an individual, spouse and child have family HDHP coverage with a $2,500 deductible. The HDHP does not provide benefits for vision or dental care. They are also covered by a combination limited purpose/post-deductible HRA that pays or reimburses § 213(d) medical expenses incurred by each family member after the family
incurs $2,500 in covered medical expenses, and pays or reimburses vision and dental expenses before and after the HDHP deductible is satisfied. On February 15, 2008, the family incurs $2,500 in vision and dental expenses that are reimbursed by the HRA. On March 17, 2008, the family then incurs $400 in expenses covered by the HDHP (but for the deductible). The family must incur an additional $2,100 in covered medical expenses before the HDHP deductible is satisfied.

The HRA may not reimburse the family for the $400 of expenses because the family had not incurred $2,500 in covered expenses when the $400 was incurred.

Prop. Treas. Reg. §1.125-5(m)(4)(i):
(4) Post-deductible health FSA.
(i) In general. A post-deductible health FSA is a health FSA described in the cafeteria plan that only pays or reimburses medical expenses (as defined in section 213(d)) for preventive care or medical expenses incurred after the minimum annual HDHP deductible under section 223(c)(2)(A)(i) is satisfied. See paragraph (k) in this section. No medical expenses incurred before the annual HDHP deductible is satisfied may be reimbursed by a post deductible FSA, regardless of whether the HDHP covers the expense or whether the deductible is later satisfied. For example, even if chiropractic care is not covered under the HDHP, expenses for chiropractic care incurred before the HDHP deductible is satisfied are not reimbursable at any time by a post-deductible health FSA.

IRS Notice 2004-2:
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.

IRS Revenue Ruling 2004-45:
“Permitted coverage” (whether through insurance or otherwise) is coverage for accidents, disability, dental care, vision care or long-term care. Section 223(c)(2)(C) also provides a safe harbor for the absence of a preventive care deductible.

IRS PLR 200704010:
Section 223(c)(1)(B)(ii) defines “permitted coverage” as coverage for accidents, disability, dental care, vision care or long-term care (whether through insurance or otherwise).

IRS Notice 2004-50:
Q-8. Must coverage for “permitted insurance” described in section 223(c)(3) (liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property, insurance for a specified disease or illness, and insurance paying a fixed amount per day (or other period) of hospitalization), be provided under insurance contracts?
A-8. Yes. Benefits for “permitted insurance” under section 223(c)(3) must generally be provided through insurance contracts and not on a self-insured basis. However, where benefits (such as workers’ compensation benefits) are provided in satisfaction of a statutory requirement and any resulting benefits for medical care are secondary or incidental to other benefits, the benefits will qualify as “permitted insurance” even if self-insured.

Consolidated Appropriations Act, 2022:
SEC. 307. EXTENSION OF EXEMPTION FOR TELEHEALTH SERVICES.
(a) IN GENERAL.—Subparagraph (E) of section 223(c)(2) of the Internal Revenue Code of 1986 is amended by inserting ‘‘or in the case of months beginning after March 31, 2022, and before January 1, 2023,’’ after ‘‘December 31, 2021,’’.
(b) CERTAIN COVERAGE DISREGARDED.—Clause (ii) of section 223(c)(1)(B) of the Internal Revenue Code of 1986 is amended by inserting ‘‘, or in the case of months beginning after March 31, 2022, and before January 1, 2023,’’ after ‘‘December 31, 2021’’.


About the author

Brian Gilmore

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.


The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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