So you think you have it all figured out. You’re going with the HSA. Wait, was it the HRA? Or, maybe it was an FSA. No, it was definitely the Health Savings Account—HSA. But then someone starts talking about all of the HSA-compatible account options you have. The choices can be overwhelming and the desire might be to ignore it all.
In this two-part post, we will try to break it down. First, we will start with the basics and explain what makes an account HSA-compatible. Then, we will take a deeper dive into a winning combination—the HSA with post-deductible HRA.
Start with the Basics
An HSA or Health Savings Account is a tax-advantaged account owned by the individual participant. It can be funded by the individual, the employer or even a third party. Funds automatically rollover from year-to-year and are never lost due to employment changes.
In order to have an HSA, individuals must meet the eligibility requirements set by the IRS. First, you have to have an HSA-compatible health plan (sometimes referred to as a high deductible health plan). Insurance companies have (for the most part) made it easy to identify these plans with names like HSA Advantage Plan. At a quick comparison, you know which plans qualify for an HSA.
Second, you can’t have any coverage that is not HSA-compatible. It is sometimes followed by the comment, “If you are covered by a General FSA or HRA, you may not qualify for an HSA.” This is the one that takes an in-depth understanding to really get and where we will focus our efforts. In order to have an HSA with an FSA or HRA, it must be HSA-compatible.
What are the core elements of HSA-compatible plans?
When HSAs were developed, rules were established to prevent employees from “double-dipping”. “Double-dipping” is where an individual attempts to receive payment from two sources for the same expense. In order to reduce the temptation, rules were established to limit the types of plans and accounts that an individual could have while also contributing to an HSA. There are three primary ways a pre-tax plan can be HSA-compatible.
It can be for specialized use.
The most common HSA-compatible account is the Limited Purpose FSA (or Limited Purpose HRA). A Limited Purpose FSA is typically designed to pay eligible dental and vision expenses. Employees are able to set-aside a designated amount to be used on dental and vision expenses. For individuals with known expenses, this is a great way to maximize savings (and potentially improve cash flow). The Limited FSA aids in the transition from a “traditional health plan” to the HSA-compatible health plan. To learn more about the Limited FSA, we encourage you to check out The Case for a Limited FSA.
It can be designated for the future.
Health Reimbursement Accounts (HRAs) can also be HSA-compatible when intended for future use. There are two versions but the end result is roughly the same. The HRA could be designed as a Retirement HRA. The individual could receive allocations towards an HRA that could only be accessed in retirement after the individual is no longer actively contributing to an HSA.
The second variation is the Suspended HRA. In this case, the HRA is suspended or frozen until a point in the future where the individual is no longer contributing to the HSA. The Suspended HRA does not accrue new value or allow for distributions while contributing to the HSA. The key to both of these accounts is that the individual is not permitted to use the HRA at any time while contributing to an HSA. While these accounts are permitted, they are not common plan offerings.
It can be post-deductible.
This is where interesting things can happen. A post-deductible account is designed to begin paying eligible medical expenses once a minimum deductible has been met. The rules indicate the plan must only meet the minimum statutory deductible for HSAs, not necessarily the deductible of the plan. Oh, the possibilities with this one.
Be sure to catch part two. HSAs and Pre-tax Benefits: A winning combination—the HSA with post-deductible HRA?