Note: I'm not a CPA. None of this should be taken as tax advice. Hopefully you don't get your tax advice from blogs anyway.
Everyday I talk to employers, agents, or other financial professionals who ask me questions about Health Savings Accounts (HSAs), and how they function with Health Reimbursement Arrangements (HRAs) and insurance plans. See Tyler's earlier post "
The difference between HRAs and HSAs" for appropriate background.
A common question I receive is "Can an employee have an HRA and HSA at the same time?" The answer is: "Absolutely, yes. And they should!" (See
US Treasury FAQ 8)
To be eligible for a Health Savings Account (See
US Treasury FAQ 1), an individual must:
1) be covered by a HSA-qualified High Deductible Health Plan (HDHP), and
2) not be covered by other health insurance that is not an HDHP.
In other words, all plans that the individual uses must be "HSA-qualified" (including HRAs).
For 2009, U.S. federal regulations require citizens to have a minimum deductible of $1,150/year ($2,300 for families) on their health insurance from all sources (including HRAs) in order to make tax-deductible contributions to their Health Savings Accounts (HSA). For detailed information on how this affects HRAs, see
IRS Ruling 2004-45. Read below for the English translation.
An HSA-qualified plan (whether it is an HRA or insurance plan) must not provide coverage under the deductible requirement (e.g. $1,150 for singles) for any expense other than:
- Health insurance premiums
- Wellness/preventative care (e.g. checkups, mammograms, smoking cessation, weight loss)
- Expenses resulting from accidents
- Dental expenses
- Vision expenses
Once the HSA deductible is met, the HRA can reimburse all qualified medical expenses.
Obviously, a standard HRA will make you ineligible for an HSA because it would provide coverage for all medical expenses below the HSA deductible. Therefore, an employee must modify their HRA to make it "HSA-qualified". Here at Zane Benefits we call this feature "HSA-compatibility". All HRA providers should allow an employee to make their HRA HSA-qualified.
Now, to summarize...
In order for an employee to have an HRA and HSA at the same time, the employee must:
1. Purchase an HSA-qualified insurance plan, and
2. Make their HRA HSA-qualified by putting a deductible on the HRA for all medical expense except for the allowed categories (see 1-5 above).
Let's walk through two examples...
There are two basic ways an employee might receive HRA dollars from their employer:
1) A supplemental HRA providing deductible coverage alongside an employer-sponsored group plan (e.g. GroupHRA)
2) A stand-alone HRA providing premium reimbursement of an individual policy as well as deductible coverage (e.g. ZaneHRA)
Both uses of an HRA provide great employee benefits, while giving employers and employees more control of their healthcare dollars.
In each of the above scenarios, certain requirements must be met before an employee (or his or her employer) may contribute tax-free to the employee's HSA.
Scenario 1: A supplemental HRA providing deductible coverage alongside an employer-sponsored group plan (e.g. GroupHRA)
When choosing the group plan, the employee must first make sure they have an HSA-qualified plan. Note: If the employer does not offer an HSA-qualified plan, the employee might want to consider buying an HSA-qualified individual policy on their own.
Second, the employee must make sure that their HRA is HSA-qualified. This means that they must put a deductible on the HRA equal to the HSA-deductible requirement (e.g. $1,150 for singles in 2009) for all expenses except the 5 allowed categories (Premiums, Wellness/preventative care, Expenses resulting from accidents, Dental, Vision)
Example: John is single, with no dependents, and has an HSA. Because he wants to deduct his planned $1,500 2009 HSA contribution for his 2009 taxes, he activates an HSA-Compatibility Deductible of $1,150 on his HRA. During 2009, John submits claims totaling $1,455 for dental, vision, annual checkup, and preventative medicine for which he is reimbursed 100% from his HRA. The first $1,150 in expenses that are not covered by his HRA, John covers with his HSA. After the HRA deductible is met, John uses his HRA for all qualified medical expenses.
Scenario 2: A stand-alone HRA providing premium reimbursement of an individual policy as well as deductible coverage (e.g. ZaneHRA)
When choosing an individual plan, the employee must first make sure they have an HSA-qualified plan.
Second, the employee must make sure that their HRA is HSA-qualified. This means that they must put a deductible on the HRA equal to the HSA-deductible requirement (e.g. $1,150 for singles in 2009) for all expenses except the 5 allowed categories (Premiums, Wellness/preventative care, Expenses resulting from accidents, Dental, Vision)
Example: Steve is single, with no dependents, and has an HSA. Because he wants to deduct his planned $1,500 2009 HSA contribution for his 2009 taxes, he activates an HSA-Compatibility deductible of $1,150 on his HRA. During 2009, Steve submits claims totaling $2,400 for individual insurance premiums for which he is reimbursed 100% from his HRA. The first $1,150 in expenses that are not covered by his HRA, Steve covers with his HSA. After the HRA-deductible is met, Steve's uses his HRA for all qualified medical expenses.
