Health Savings Account Blog                  

“The good news is that we have gotten answers to a lot of questions,” said Karen Frost, a consultant with Hewitt Associates.

By resolving so many issues, experts say the guidance will speed up employers’ already rapid adoption of HSA-linked consumer-driven health-care plans. Enrollment in HSA-linked high-deductible health insurance plans climbed to 6.1 million as of Jan. 1, a 35% increase from a year earlier, according to America’s Health Insurance Plans, a Washington-based trade group.

“Some employers were reluctant to put in the arrangements until they had, in black and white, answers to questions that had been raised,” said Sharon Cohen, an attorney with Watson Wyatt Worldwide.

“This will be another boost to Health Savings Account growth,” said Andy Anderson, of counsel with Morgan Lewis & Bockius in Chicago.

Experts concur that the biggest issue addressed by IRS Notice 2008-59 involves on-site clinics. Such clinics have proliferated in recent years for a variety of reasons, including corporate belief that care can be delivered at a lower cost in a clinic compared with physician offices and other medical settings while reducing how long employees receiving care must be away from their jobs.

The interaction of clinic cost-sharing features and HSA eligibility requirements was unclear until the new guidance was issued. Under federal law, Health Savings Accounts must be linked to high-deductible health plans, with employees being subject this year to deductibles of at least $1,100 for individual coverage and $2,200 for family coverage.

And since many on-site clinics provide services at little or no cost to employees, many employers were uncertain if those low cost-sharing requirements would make employees ineligible for Health Savings Accounts.

The IRS answer is that employees’ HSA eligibility is unaffected by access to free or low-cost care at on-site clinics as long as the clinic does not provide “significant” medical benefits. Annual physicals, immunizations, allergy injections, non-prescription painkillers and treatment of on-the-job injuries would not be considered significant.

The breadth of services allowed without running afoul of the HSA cost-sharing requirements “gives the green light to a lot of on-site clinic” arrangements, said Jay Savan, a principal with Towers Perrin.

On the other hand, employees with access to on-site corporate clinics that provide extensive services at little or no cost would lose HSA eligibility. The IRS, in its guidance, provides a specific example: a hospital that allows its employees to receive care at its facilities for all of their medical needs at little or no cost.

“In short, the care provided can’t be too comprehensive,” said Watson Wyatt’s Ms. Cohen.

Still, the IRS has not fully resolved the on-site clinic-HSA eligibility issue, she said, noting there can be arrangements that fall between the IRS-provided examples of a design that passes muster and another that does not. “What if you are in between the examples? How much care is too much? There still is some vagueness, but at least some guidance has been provided.”

Among numerous other issues, the guidance makes clear that an employer can try to recover contributions it mistakenly made to an employee’s HSA. In that situation, the employer could approach the financial institution holding the money to ask for return of the funds. If that effort was not successful by the end of the year in which the contribution was made, the employer could include the amount as income on an employee’s W-2 statement.

The guidance also addresses another issue: Can employers provide HSA enrollees with debit cards that are coded to allow payment only of health-care expenses? The issue arose because federal law allows enrollees to withdraw funds from their Health Savings Accounts for any purpose, though they are taxed and the employee is hit with a 10% penalty tax for distributions not related to health care if the employee is under 65.

Resolving the issue, the IRS said restricting debit card payments to health-care expenses would pass muster as long as enrollees can access their HSA account through online transfers, withdrawals from automatic teller machines or writing a check. Even before the latest guidance, though, some vendors were limiting debit card use to qualified medical expenses.

“You are OK if you provide access to account funds through other means,” said Kathy Klug, director of compliance with Affiliated Computer Services in Minneapolis.

The guidance also makes clear that so long as an HSA enrollee is at least 65, the enrollee can withdraw funds from the HSA to pay for Medicare Part D prescription drug premiums. However, if the enrollee is younger than 65 and has a spouse older than 65, the spouse’s Medicare Part D premiums would not be considered eligible medical expenses, and distributions used for that purpose would be included in the enrollee’s taxable income.