This is page four of a Health Savings Account Handbook guide. Start with page one to understand all of the ins and outs of Health Savings Accounts (HSAs).
Contents
Overview
The terms “consumer-driven health plan” or “consumer-directed health plan” (sometimes abbreviated as CDHP) are interchangeable and describe a comprehensive health plan that involves greater participation by the consumer.
The previous page provided an overview of Health Savings Accounts (HSAs) and the requirements for health plans to qualify for HSAs. In this page, we delve deeper into HSA-qualified health plans within the framework of consumer-directed healthcare (CDHC). We also explore how HSAs relate to other consumer-directed benefits (CDBs).
Typically, these plans combine a lower-premium health plan with a tax-advantaged healthcare account, such as a Health Savings Account (HSA), Health Reimbursement Arrangement (HRA), or Flexible Spending Arrangement (FSA). Members of these plans typically pay for routine healthcare expenses directly from their HSA, FSA, or HRA.
All health plans compliant with the Patient Protection and Affordable Care Act (PPACA) include an out-of-pocket maximum to protect covered individuals from significant medical expenses. Consumer-driven health plans encourage consumer involvement in healthcare decision-making and self-care to optimize the cost-effectiveness of their healthcare.
With this type of plan, you can pay for your medical expenses using several methods:
- Firstly, you cover your qualified medical expenses until you reach your deductible, reimbursing yourself from your HSA, FSA, or HRA. Your employer may have contributed to the account to assist with these expenses.
- Once you meet your deductible, you share the costs with your health plan until you reach your out-of-pocket limit, again reimbursing yourself from your HSA, FSA, or HRA. Once more, your employer’s contributions may aid with these expenses.
When you hit your out-of-pocket maximum, your health plan covers all further in-network costs for the plan year.
For over a decade, employers have offered various types of consumer-directed benefit accounts, such as HRAs, HSAs, FSAs, and state and federal Archer Medical Spending Accounts (MSAs).
Consumers use these accounts to cover medical copayments, dependent care, dental and vision expenses, and other qualified medical expenses with tax-advantaged (or pre-tax) dollars. Each type of account offers its own advantages. In some cases, complementing an HSA with an HSA-qualified FSA or HRA can provide useful options for making the HSA-qualified health plan even more appealing to both employees and employers.
Some employees utilize these specially designed FSAs and HRAs to extend the reach of their HSA balances, but those contributing to an HSA may only utilize certain types of FSAs or HRAs—those that are HSA-qualified.
Consumer-directed health plans can control costs and, simultaneously, may enhance overall health and well-being due to the emphasis on cost transparency and consumer responsibility.
According to a study by McKinsey & Company, patients with consumer-directed health plans inquire about costs and opt for less expensive treatment options more frequently than patients enrolled in traditional plans.
As mentioned earlier, HSA ownership necessitates health coverage that meets specific statutory requirements. These HSA-qualified health plans are a particular type of consumer-driven health plan. To understand what distinguishes various types of consumer-directed health benefits and how they interact with one another, continue reading.
HSA-qualified health plans
HSA-qualified health plans must meet specific deductible and out-of-pocket requirements to allow members to contribute to an HSA. These plans typically cover 100% of qualified medical expenses once the member has reached their annual out-of-pocket maximum. This helps protect members from facing significant and unexpected healthcare costs.
However, it’s essential to note that coverage can vary depending on your employer and the plan you choose. While all HSA-qualified health plans are required to cover certain preventive care services under the Patient Protection and Affordable Care Act (PPACA), other coverage details may differ.
When transitioning to a new health plan, it’s crucial to familiarize yourself with its provisions. You can find detailed information in documents like the Summary Plan Description (SPD) and the Summary of Benefits and Coverage (SBC) provided during enrollment. Additionally, you may need to review the plan’s drug formulary to ensure that it covers the medications your family requires.
Referencing Page 2, “Health coverage terms,” and Page 3, “Health Savings Accounts,” of this guide, HSA-qualified health plans must adhere to specific guidelines regarding deductibles and other features.
| Minimum annual deductible | Minimum annual deductible | Out-of-pocket maximum | Out-of-pocket maximum | |
| Single | Family | Single | Family | |
| 2021 | $1,400 | $2,800 | $7,000 | $14,000 |
| 2022 | $1,400 | $2,800 | $7,050 | $14,100 |
| 2023 | $1,500 | $3,000 | $7,500 | $15,000 |
| 2024 | $1,600 | $3,200 | $8,050 | $16,100 |
Types of coverage
Self-only HSA-qualified health coverage
Self-only coverage refers to a health insurance plan that provides coverage solely for the individual enrolled in the plan.
Family HSA-qualified health coverage
Family HSA-qualified health coverage extends to an eligible individual and at least one other person, even if the additional person is not eligible to open their own HSA. For instance, the other person might have a self-only plan that prevents them from contributing to an HSA. However, the eligible individual can contribute to their HSA at the Family coverage limits.
Example: Family coverage Harper and Noah, a married couple, have one daughter. Noah selects HSA-qualified coverage from his employer that covers his entire family. Harper has self-only coverage from her employer, but not an HSA-qualified health plan. Noah can make a full family contribution to an HSA, provided he has no other disqualifying coverage.
Employee-plus-one HSA-qualified health coverage
If an eligible individual and their dependent child are covered under an employee-plus-one HSA-qualified health plan, the Internal Revenue Service (IRS) considers them to have family coverage, allowing them to make a full family contribution to an HSA.
Example: Employee-plus-one coverage Before the birth of Noah’ and Harper's daughter, he had employee-plus-one coverage, because of the convenient in-network facilities and providers. Harper also maintained self-only coverage because of the in-network specialists she preferred to see. Noah can make a full family contribution to his HSA, provided he has no other disqualifying coverage, though Harper cannot open or contribute to an HSA, even if she has an HSA-qualified plan, because she has other coverage (from Noah). However, Noah can use his HSA to reimburse Harper's out-of-pocket expenses.
Benefits and restrictions
The IRS has specific rules regarding the types of insurance that can be held alongside an HSA-qualified health plan. If you have another policy that provides benefits similar to those covered by your HSA-qualified health plan, you may become ineligible to contribute to an HSA. The next section outlines some benefits that could impact your HSA eligibility.
Benefits for prescription medications
Certain plans include prescription drug benefits through separate plans, often known as pharmacy riders. These riders cover prescription drugs even before meeting the deductible. However, under HSA regulations, these prescription drug benefits are generally not considered permissible coverage unless they exclusively cover preventive care medications.
If an individual is covered by an ineligible prescription drug plan or rider, they may not open or contribute to an HSA because the prescription plan provides coverage for medications before the deductible is met.
Discount cards and drug coupons
HSA owners can utilize discount cards or drug coupons to receive price reductions on services or health products, such as prescription drugs. However, they must still pay the healthcare costs, including the value of the discount or coupon, until they meet their deductible.
It’s worth noting that some states are contemplating or have already enacted legislation that would apply the value of the discount or coupon towards both the deductible and out-of-pocket limits. This can render individuals ineligible to contribute to an HSA.
Efforts are ongoing to establish safe harbors for HSA-qualified plans to safeguard individuals’ eligibility to contribute to HSAs. It’s crucial to comprehend how your plan operates and confirm whether it is indeed HSA-qualified.
Hospitalization indemnity plans
An indemnity plan provides benefits through cash payments rather than reimbursing for specific services, usually offering a fixed amount for each day spent in the hospital. These plans can safeguard your HSA funds and assist in covering qualified hospital expenses, especially before you accumulate a significant account balance.
Hospitalization indemnity plans require hospital admission to initiate benefits. They do not cover the actual hospital services, such as medical tests conducted within a hospital or related facility, but instead offer cash benefits for each day of hospitalization. Importantly, hospitalization indemnity plans do not affect HSA eligibility.
Specified disease or Iillness plans
Specified disease or illness plans operate similarly to indemnity plans by providing benefits in cash payments rather than reimbursing for services rendered.
Usually, they offer a fixed amount for a particular diagnosis or illness. These plans can safeguard your HSA funds and assist in covering healthcare expenses, especially before you accumulate a substantial account balance.
To receive benefits, a diagnosis is typically required. However, these plans do not cover actual services, such as medical tests, but only offer cash benefits for the specified diagnosis. It’s important to note that specified disease or illness plans do not affect HSA eligibility.
Care from IHS or VA
Obtaining medical care from the Indian Health Service (IHS) or the Department of Veterans Affairs (VA), with the exception of dental, vision, or preventive care, renders individuals ineligible to make contributions to their HSA for a certain duration.
During any month in which medical benefits were received from the VA or an IHS facility in the preceding three months, HSA contributions cannot be made. However, if the eligibility criteria are met by one’s spouse, they may contribute the full family maximum and utilize their HSA funds to cover the family’s expenses.
The IRS does waive the three-month rule for veterans undergoing treatment for service-connected disabilities.
Other permitted coverage
The tax code and the IRS have established specific rules regarding insurance plans that can coexist with HSAs and those that might potentially disqualify individuals from contributing to an HSA. Here are some key points to keep in mind:
Permitted coverage
Here are some insurance plans and programs that generally do not disqualify individuals from contributing to an HSA:
- Automobile insurance
- Dental insurance
- Vision insurance
- Long-term care insurance
- Wellness programs provided by employers that do not offer significant medical benefits
- HSA-qualified Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs), including:
- Limited purpose FSAs and HRAs, which are restricted to covering dental, vision, or preventive care expenses only
- Post-deductible FSAs and HRAs, which pay for qualified medical expenses after the individual meets the minimum required deductible for an HSA-qualified plan
- Employer-sponsored HRAs that exclusively cover medical expenses after retirement
- Workers’ compensation insurance
- Tort liability coverage
- Prescription or other discount programs or coupons, as long as individuals are responsible for paying the healthcare costs until they reach their full medical deductible
- Other health plans, including those not explicitly labeled as HSA-qualified health plans, such as:
- HSA-qualified Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO) plans, provided the deductible meets or exceeds the minimum requirements for an HSA-qualified health plan and other statutory criteria
- Family HSA-qualified health coverage with an embedded individual deductible, as long as the embedded deductible equals or exceeds the minimum required deductible for a family HSA-qualified health plan
Disallowed coverage
Here are some types of FSAs or HRAs, and other programs, which may disqualify individuals from contributing to an HSA:
- General FSAs or HRAs that cover any qualified medical expense before meeting the deductible of the HSA-qualified health plan. (Limited-purpose and post-deductible FSAs and HRAs are exceptions allowed by the IRS.)
- A spouse’s FSA or HRA that covers qualified medical expenses before reaching the deductible of the HSA-qualified health plan.
- Employer payments or reimbursements for medical expenses that fall below the minimum deductible required by the HSA-qualified health plan.
- Medicare coverage.
- Health benefits or prescription drugs received from the Department of Veterans Affairs (VA) or its facilities in the last three months. (However, beginning January 1, 2016, hospital care or medical services received under any law administered by the Secretary of Veterans Affairs for a service-connected disability are considered allowable coverage.)
- TRICARE coverage.
Comparison of HSAs, FSAs, and HRAs
The following table compares three common types of medical payment accounts. Refer to the table as you read more detailed descriptions of each account in following sections.
| HSA | FSA | HRA | |
|---|---|---|---|
| Health Savings Account | Health Flexible Spending Arrangement |
Health Reimbursement Arrangement |
|
| Purpose | Long-term savings /investment |
Short-term spending account | Employer-funded reimbursement |
| Variations | May or may not be offered through a cafeteria plan | General purpose, HSA-qualified FSAs, including limited purpose, post-deductible FSAs | EBHRA | ICHRA | QSEHRA | Retiree HRA, HSA-qualified including Limited Purpose HRA and Post-Deductible HRA |
| Health plan types | HSA-qualified health plan required | Various | Various or, in some cases, none |
| Account ownership | Member-owned, portable, transferable, inheritable | Employer-owned (no portability) | Employer-owned (no portability) |
| Restrictions | Must have an HSA-qualified health plan. Cannot have Medicare or other impermissible coverage. Must not be claimed as a tax dependent. | Compatible with traditional health plans. | Compatible with most health plans |
| Contributors | Anyone (member, employer, family member) | Member, employer | Employer only (except COBRA) |
| 2024 contribution limits | $4,150/$8,300 (individual/family) $1,000 catch-up for over 55 for either individual or family |
Varies | |
| Employer contributions | Count towards contribution limit | Do not count towards contribution limit | REQUIRED; no employee contributions allowed |
| Tax deductions | Contributions, earnings, and distributions, for qualified medical expenses | Contributions and distributions, for eligible medical expenses | Contributions and distributions, for eligible medical expenses |
| Use-or-lose? | No | Yes | Depends on plan design |
| Covered individuals | Holder, spouse, other tax dependents | Employee, spouse, other tax dependents, <26-year-old children | Employee, spouse, other tax dependents, <26-year-old children |
MSAs and Archer MSAs
Archer Medical Savings Accounts (MSAs), introduced in 1997, served as precursors to Health Savings Accounts (HSAs). The Archer MSA program continued until 2007, allowing existing accounts to persist while barring the creation of new ones.
The intent behind Archer MSAs was to instill a sense of cost-consciousness among participants by exposing them to the true expenses of healthcare services. These accounts offered a more economical option for small employers and self-employed individuals compared to traditional health plans with high premiums and low deductibles.
Moreover, owners could carry over any unused funds from one year to the next, promoting long-term savings.
However, the impact of Archer MSAs was constrained by their limited availability. Only self-employed individuals and employees of small businesses could enroll, thereby restricting the program’s reach.
With the advent of HSAs in 2003 and the subsequent termination of the MSA pilot program, HSAs largely supplanted MSAs, offering a more inclusive and widely embraced alternative.
FSAs
A Flexible Spending Account (FSA) enables employees to allocate a portion of their pre-tax income to cover various expenses that aren’t typically covered by insurance or other benefit plans, such as copays, deductibles, dental, and vision expenses.
However, only certain types of FSAs, namely limited purpose or post-deductible FSAs that are HSA-qualified, are compatible with Health Savings Accounts (HSAs).
FSAs often provide flexibility in adhering to the Use-or-lose rule, which stipulates that unused funds may be forfeited at the end of the plan year.
Some FSAs allow participants either to carry forward a portion of their balance to the next year (up to 20% of the maximum contribution limit) or to utilize a grace period of up to two and a half months after the plan year concludes to spend remaining funds from the previous year.
It’s important to note that an FSA can offer either a carryover or a grace period, but not both.
Furthermore, FSAs must comply with the uniform coverage rule, ensuring that the maximum reimbursement amount is available throughout the coverage period.
In certain circumstances, individuals may opt for an FSA over an HSA, particularly if they anticipate significant healthcare expenses early in the plan year that they cannot cover out-of-pocket.
Examples: HSAs with and without matching funds Nazhin and her husband both have access to an FSA. Nazhin had a heart transplant several years ago and always meets her deductible early in the year. This year, she meets her HSA-qualified health plan’s out-of-pocket maximum of $5,500 in February. She and her husband can both contribute $2,850 to their FSAs in 2022, for a total of $5,700. Nazhin’s employer does not make HSA contributions. Because Nazhin and her husband do not have liquid funds available for their health expenses early in the year, they decide that having each of them contribute the maximum to their FSAs will benefit them more financially than contributing to their HSA at this time. Nazhin can receive reimbursement for out-of-pocket expenses of $5,500 as she submits claims for them, even though she and her husband have not yet contributed the full amount. The situation changes the following year when Nazhin’s employer puts in a match of $2 for every dollar contributed to an HSA and includes a feature that allows Nazhin to advance her employer contributions, so she can use the money before she contributes it. Nazhin and her husband decide to open an HSA and contribute the family maximum of $7,750. In 2023 Nazhin contributes $2,583.33 and her employer matches it with an additional $5,166.67 for a total of $7,750. This allows Nazhin and her husband to receive reimbursement for their out-of-pocket expenses (up to the maximum out-of-pocket for their plan of $5,500), but still have a balance of $1,700 in their HSA for qualified out-of-pocket medical expenses in the future
HRAs
Health Reimbursement Arrangements (HRAs) are favored by some employers as they enable them to reimburse employees for various eligible medical expenses, including copayments, deductibles, vision and dental expenses, prescriptions, and personal health coverage premiums.
Contributions made by employers to employees’ HRAs are not subject to taxes, and likewise, employees do not pay taxes on the reimbursements they receive.
There are several types of HRAs available to suit different needs, including Group Coverage HRAs, Dental/Vision HRAs, Limited Purpose HRAs, Post-deductible HRAs, Qualified Small Employer HRAs (QSEHRAs), Individual Coverage HRAs (ICHRAs), Excepted Benefit HRAs (EBHRAs), and Retiree HRAs.
The process for utilizing an HRA typically involves the following steps:
- Employer designs the plan, specifies which employees are eligible to participate, and sets reimbursement limits.
- Employee incurs healthcare costs.
- Employee submits claims for reimbursement.
- Employer reviews the claim and reimburses the employee, up to the predetermined limit.
HRAs can function independently or alongside other health benefits, depending on the specific type of HRA. Employers have the flexibility to customize the design of their HRA plans. Depending on the plan design, unused funds may roll over to the subsequent HRA plan year, and employees may also be able to utilize HRA funds after termination or in retirement.
Specialized accounts
Having a general Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) can indeed render you ineligible to contribute to a Health Savings Account (HSA).
However, employers have the option to offer HSA-qualified versions of these plans to employees who are also covered by an HSA-qualified health plan.
For a comprehensive comparison of different types of HRAs, please refer to the table below. Detailed descriptions of each type of HRA follow the table for further clarification.
| HRA | HSA-Qualified HRA | QSEHRA | |
|---|---|---|---|
| Health Reimbursement Arrangement | Post-Deductible or Limited Purpose HRA |
Qualified Small Employer HRA | |
| General purpose | An HRA to help with out-of-pocket costs | An HRA for HSA owners | HRAs for small businesses |
| Eligible expenses | Out-of-pocket medical expenses | Either limited to dental and vision expenses, or to out-of-pocket medical expenses incurred after your deductible | Out-of-pocket medical expenses |
| Pays coverage premiums | No | No | Individual and group (group premiums reimbursed after tax) |
| Compatible with FSA | Yes | Yes | No |
| Compatible with HSA | No | Yes | Sometimes |
| Premium Tax Credit (PTC) | Affordable MV coverage disqualifies | No impact | Affordable MV coverage disqualifies |
| HSA eligibility | Other group health coverage required | No impact | QSEHRA not available |
|
ICHRA |
EBHRA |
Retiree HRA |
|
|---|---|---|---|
| Individual Coverage HRA | Excepted Benefit HRA | Retiree-Only HRA | |
| General purpose | Like QSEHRA, with higher limits | May limit benefits (perhaps no vision or dental coverage) | Only for use after retirement |
| Eligible expenses | Out-of-pocket medical expenses, some premiums | Based on design, but potentially all eligible out-of-pocket medical expenses | Based on design, but potentially all eligible medical expenses |
| Pays coverage premiums | Individual only | COBRA EBHRA STLDI22 | No |
| Compatible with FSA | Yes | Yes | Yes |
| Compatible with HSA | Sometimes | Sometimes | Sometimes |
| Premium Tax Credit (PTC) | Affordable MV coverage disqualifies | No impact | Affordable MV coverage disqualifies |
| HSA eligibility | ICHRA unavailable unless with a restricted FSA | Non-excepted, group health plan required | No impact |
| New availability maximum | N/A | in 2022 | N/A |
HSA-qualified FSA/HRA
An HSA-qualified FSA or HRA might cover less stuff compared to a regular one. For instance, it could only help pay for dental and vision stuff or certain other medical costs. Or, it might cover all the medical costs allowed under the law, but only after you’ve paid a certain amount out of your own pocket for healthcare during the year.
Limited purpose HRA/FSA
Limited Purpose FSAs (LPFSAs) and Limited Purpose HRAs (LPHRAs) focus only on covering dental and vision expenses. They work alongside HSAs, allowing you to use money from both accounts for different needs simultaneously. LPFSAs offer the perk of having access to the entire account balance right from the start of the plan year, even if you haven’t contributed all your funds yet.
In short, here are the key points about LPFSAs:
- They cover only dental and vision expenses.
- They don’t affect your eligibility for an HSA, unlike regular health FSAs.
- You fund them with pre-tax dollars.
It’s a good idea to contribute to an LPFSA if you plan to max out your HSA contributions for the year. However, be aware that unlike regular FSAs, LPFSAs usually don’t allow you to roll over unused funds or provide a grace period at the end of the year. Thankfully, forfeiting unused funds is rare with LPFSAs because dental and vision expenses are usually easier to predict.
Example: Maximizing tax-advantages through an LPFSA James has an HSA with an LPFSA that covers vision and dental expenses only. When his wife, Roshni, takes their young son to the dentist, the dentist says they will need a dental appliance to correct a jaw problem. Roshni asks the dentist for a cost estimate for the appliance, as well as for other dental work James will need during the coming year. Roshni also wants to replace her prescription sunglasses. She contacts several optical shops to compare costs and gets estimates for exams, frames, and lenses. In 2022, James and Roshni want to maximize their HSA contribution so they can start investing the funds. James sets up his payroll deductions to contribute the full maximum for a family: $7,300. Then, he elects to contribute $2,300 to his limited purpose FSA (based on the estimates for dental work and glasses). James and Roshni protect a total of $9,600 from their taxable income. With the FSA to pay the dental and vision expenses, James and Roshni can invest more of their entire HSA contribution for the year in a mutual fund.
Post-deductible FSA/HRA
Alternatively, an HSA-qualified FSA or HRA might cover dental and vision expenses upfront but only reimburse other eligible healthcare costs after you’ve met the minimum annual deductible required for an HSA-qualified health plan. This type of FSA or HRA is often called a post-deductible FSA or HRA.
Here’s how it works: These accounts collaborate with your HSA. While they start covering dental and vision expenses right from the beginning of the plan year, they won’t pay for other eligible medical expenses until you’ve paid out of pocket to meet your HSA-qualified health plan’s deductible.
For 2022, this deductible is $1,400 for single coverage or $2,800 for family coverage (for 2023: $1,500/$3,000). Once you’ve reached this deductible, you can use the funds in your account to cover copays, coinsurance, and other medical costs.
Some post-deductible FSAs or HRAs may require you to meet the deductible specific to your HSA-qualified high deductible health plan, rather than the general minimums mentioned above. Make sure to clarify this with your employer to understand how your plan works.
If your employer offers an HSA-qualified health plan with a post-deductible FSA or HRA, you won’t be able to get reimbursed for your expenses until you’ve met your minimum deductible and provided evidence of when you met it.
Example: Gap between deductible and out-of-pocket maximum Erin's employer offers an HSA-qualified health plan with a $3,000 deductible and a $4,000 out-of-pocket maximum. To help close the gap between the plan’s deductible and the out-of-pocket maximum, her employer also offers a $500 post-deductible HRA. Erin has a lot of medical expenses during the year, and she spends her entire HSA contribution of $3,650. After meeting her deductible and paying her coinsurance, she submits a reimbursement request to her employer and receives $500 from the HRA.
Qualified small employer HRA
Introduced in 2017, a QSEHRA (pronounced cue-sarah) is a program designed for small employers with fewer than 50 employees.
It allows these employers to reimburse their employees tax-free for individual health insurance premiums and certain medical expenses instead of offering a traditional group insurance plan.
With a QSEHRA, each employee can select their own individual health insurance plan. Additionally, employees who already have coverage, such as through a spouse, can use the allowance to cover other medical expenses.
QSEHRAs offer several benefits compared to traditional group plans. They operate on a reimbursement model, often referred to as “defined contribution,” which provides employers with more control over costs.
This model also gives employees greater flexibility to choose plans that best suit their individual needs. In contrast, traditional group insurance, known as “defined benefit,” typically restricts employees to the plan(s) chosen by the employer, which may not always align with individual preferences and requirements.
Individual coverage HRA
Introduced in 2020, an ICHRA (pronounced ick-ruh) builds upon the concept of the QSEHRA by offering higher limits and greater flexibility in design. Similar to a QSEHRA, an ICHRA enables employers to reimburse employees tax-free for individual health insurance premiums.
ICHRAs offer several advantages over traditional group plans. They shift the responsibility of managing a health plan from the employer to the employee. Instead of the employer making decisions about plan features or provider networks, they only need to determine which employees qualify and set monthly allowances. Employees then have the freedom to choose their own insurance plans and use ICHRA funds from the employer to offset premium costs.
Excepted benefit HRA
Since 2019, employers have utilized EBHRA (pronounced ebb-ruh) accounts to allocate funds to employees for eligible healthcare expenses outlined in §213(d). These expenses can include vision, dental, COBRA, or short-term limited-duration insurance premiums. However, general health insurance premiums are not eligible for reimbursement under an EBHRA.
For 2022, contribution limits are set at $1,800 and $1,850 for 2023. If the plan restricts covered expenses to dental and vision only, the EBHRA may also qualify as HSA-compatible.
It’s important to note that you are not required to enroll in your employer’s group health insurance coverage to be eligible for an EBHRA.
Retiree HRA
A retiree HRA covers medical expenses that occur after retirement, excluding those incurred before retirement. While an individual can contribute to an HSA before retirement, once the retiree HRA starts covering eligible medical expenses, they can no longer contribute to their HSA. So, after retiring, they lose the ability to add funds to their HSA.
Suspended HRA
To contribute to an HSA, you might have the option to pause your HRA coverage before it starts, provided your employer allows it. During this suspension period, your HRA won’t cover any medical expenses incurred, except for preventive care or items already covered by other health plans. Once the suspension period finishes, you won’t be eligible to contribute to your HSA anymore.
Other benefits
An Employee Assistance Program (EAP) helps employees by covering some or all of the expenses for counseling, referrals, and guidance to cope with challenging situations in their lives. If an employee is enrolled in an EAP, wellness program, or a disease management plan, they can still contribute to an HSA.
However, this is only allowed if these plans don’t offer significant medical benefits.
Grace period, run-out period, carryover
Grace period for general-purpose Flexible Spending Accounts (FSAs)
Some general-purpose health FSAs offer a grace period, giving you up to two and a half months after the plan year ends to use any remaining balances in your account. During this time, you can continue to incur expenses and get reimbursed. However, not all plans provide this benefit, so it’s essential to check your plan details.
If you have money left in a general-purpose Health FSA at the end of the prior plan year, you cannot make HSA contributions during an FSA grace period that extends into the next plan year.
You can only start contributing to your HSA for the current plan year after the grace period ends.
If you enroll in a general health FSA with a grace period and plan to switch to an HSA-qualified plan for the following year, you cannot contribute to your HSA until your grace period ends and you have no remaining funds in your general Health FSA.
Example: General-purpose health FSA with a grace period balance Martin ends his traditional plan, general health FSA coverage on December 31, 2021, and opens an HSA-qualified health plan on January 1, 2022. Because he still has money in the FSA at the beginning of the new plan year, he cannot begin contributing to his new HSA until after the FSA’s grace period ends on March 15, 2022. Because HSA eligibility always begins on the first day of the month, he must wait until April 1, 2022, to make his first HSA contribution.
Example: General-purpose FSA with a zero balance Susie had a traditional health plan and a general health FSA in 2021. She starts her HSA-qualified health plan and HSA on January 1, 2022. Although her FSA technically disqualifies her during the grace period (until March 15, 2022), she spent her FSA down to zero by December 31, 2021, so she can begin contributing to her HSA on January 1, 2022.
Post-deductible FSA grace period
If you have funds in a post-deductible FSA during the FSA grace period, you may lose your eligibility to contribute to an HSA.
Example: Post-deductible FSA with balance carried into a grace period Susie ends her traditional plan with post-deductible Health FSA coverage on December 31, 2021, and opens an HSA-qualified health plan on January 1, 2022. Because she still has money in the FSA at the beginning of the new plan year, she cannot begin contributing to her new HSA until after the FSA’s grace period ends on March 15, 2022. Because HSA eligibility always begins on the first day of the month, she must wait until April 1, 2022, to make her first HSA contribution. Example: Post-deductible health FSA with a zero balance Noah had a traditional health plan and a post-deductible health FSA in 2021. He starts his HSA-qualified health plan and HSA on January 1, 2022. He is still technically covered by his FSA during the grace period until March 15, 2022. However, because he spent his FSA down to zero by December 31, 2021, he can begin contributing to his HSA on January 1, 2022.
LPFSA grace period
Having funds in a Limited Purpose Flexible Spending Account (LPFSA) during the FSA grace period does not affect your eligibility to contribute to an HSA.
Example: LPFSA with a balance carried into the grace period Zach had an LPFSA that only covered vision and dental during 2021. On January 1, 2022, he begins his new HSA-qualified coverage. Although he still has funds in the FSA during the FSA’s grace period in the new plan year, he may contribute to his HSA starting on January 1, 2022, because limited purpose FSAs do not affect HSA eligibility.
FSA carryover
The IRS sets the limit for carrying over funds from health FSAs to 20% of the annual salary reduction contribution limit. In 2022, this limit increased by $570, which is 20% of the $2,850 contribution limit.
How the employer designs the carryover provision can affect HSA eligibility. For instance, some provisions only apply to those who enroll in an FSA the following year. Others automatically transfer funds into an HSA-qualified FSA for employees who choose an HSA-qualified plan and HSA. If the employer hasn’t considered how the carryover provision affects HSA eligibility, unused funds may roll over to a plan that disqualifies you from making HSA contributions for the year.
Summary
Consumer-driven healthcare encompasses various accounts and plans, including HSAs, Archer MSAs, FSAs, and HRAs.
- Health FSAs typically disqualify individuals from opening or contributing to an HSA unless they are designed to work with an HSA. This might involve limiting expenses to vision/dental or reimbursing other expenses only after meeting the deductible.
- FSA carryovers and grace periods can influence HSA eligibility.
- HRAs come in different types, some of which may impact HSA contributions:
- GCHRA: group coverage health reimbursement arrangement
- QSEHRA: qualified small employer health reimbursement arrangement
- ICHRA: individual coverage health reimbursement arrangement
- EBHRA: excepted benefit health reimbursement arrangement
- HSA-qualified HRAs, such as LPHRA (limited purpose health reimbursement arrangement), Post-deductible HRA, and Retiree HRA.
- HSA-qualified health plan policies typically offer self-only and family coverage.
- An FSA might offer either a grace period or carryover, but not both. Each of these options could affect HSA eligibility.