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How to tell if your HDHP is HSA-qualified

Written by: Elizabeth Walker
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Published on December 5, 2022.

Employers offering a high deductible health plan (HDHP) can choose to offer a health savings account (HSA) alongside the HDHP to add more value to their employee health benefit. An HDHP combined with an HSA enables you to offer traditional health insurance with triple tax advantages, and provides greater flexibility and customization over how your employees use their health benefit.

However, not all HDHPs are HSA-qualified. This article will cover the ins and outs of HSAs, including HDHP eligibility, contribution limits, and how they can work with a health reimbursement arrangement (HRA) to help supplement an HDHP.

Learn everything you need to know about HSAs in our complete guide

What is a high deductible health plan (HDHP)?

According to the IRS, in 2023, a high deductible health plan is any health plan that has a minimum deductible of $1,500 for individuals and $2,800 for families. In many cases, these higher deductibles mean that the health plan will have a lower monthly premium payment.

Having a plan with a higher deductible doesn't necessarily mean your employees won’t be able to get their basic healthcare covered if they’re short on cash. With an HDHP, certain preventive care benefits and medical services—like annual physicals, well-child care, immunizations, and screenings— don’t require any copayments or coinsurance, regardless if you’ve met your deductible.

If any of your employees have a chronic condition, are elderly, need specific prescription drugs, or require ongoing treatment, they may end up paying more. Therefore, an HDHP typically works best for younger or relatively healthy individuals who don’t often need much medical care outside preventive care services.

What is a health savings account (HSA)?

An HSA is a tax-advantaged savings account that lets your employees set aside pre-tax money to pay for qualified medical expenses, such as deductibles, copayments, coinsurance, and other out-of-pocket expenses.

Individuals can use their HSA to pay for 200+ eligible expenses, as outlined in IRS Publication 502. The amount withdrawn will not be taxed as long as HSA withdrawals are used to pay for qualified medical expenses not covered under the HDHP.

There are many advantages of an HSA for employees:

  • Plan holders receive tax-free withdrawals and aren’t taxed on income that goes directly to their HSA, which can help with the cost of a high annual deductible
    • HSAs have an annual contribution limit. However, contributions can be made by the plan participant or their employer. In many cases, employers contribute a matching dollar amount to the account
  • Employees can use it to save for retirement
    • At age 65, employees can use their HSA funds to pay for non-qualified expenses without a penalty.
    • If employees use their HSA on non-qualified items under age 65, they’ll be subject to a penalty and have to pay federal income taxes on the withdrawal.
  • Employees have the option to invest a portion of the funds
    • Employees can typically invest a portion of their balance in mutual funds, stocks, and bonds if they maintain a certain account balance
  • The funds will never expire
    • Unlike a flexible spending account (FSA), HSA contributions don’t have to be spent or withdrawn during the year they’re added to the account. Balances roll over from year to year, even if your employee leaves your organization

Keep in mind that before you can contribute to your employees’ HSA, they must be enrolled in an HDHP. HDHPs have a higher annual deductible than traditional insurance plans. However, they have lower monthly premiums, making them attractive to both employers and individuals.

What qualifies a HDHP for an HSA?

HSAs are only available to those covered by an HDHP who don’t have any other type of health insurance. However, many people don’t realize that having an HDHP alone doesn’t necessarily make it HSA-qualified. There are three important criteria the health plan must meet to make your plan eligible.

According to the IRS1, HSA-qualified HDHPs must have:

  • A higher annual deductible than typical individual health insurance plans.
  • A maximum limit on the annual deductible and medical expense costs, including copays and other items.
  • No insurance coverage until the deductible is met, except for the following expenses:
    • Health insurance premiums
    • Long-term care premiums
    • Dental expenses
    • Vision expenses

How to tell if you have an HSA-compatible HDHP

If you're unsure if your current health insurance policy is HSA-eligible, you can check your policy’s coverage details or contact your insurance company directly for clarification.

If you’re new to HDHPs and HSAs, understanding the many requirements can be difficult to navigate. It helps to know that the federal marketplace and state insurance carriers label their plans as HSA-eligible, so you can ensure you're selecting the right plan before purchasing an individual policy.

If you’re interested in shopping for an HSA-qualified HDHP, meeting with a local insurance broker can help you find one that meets your needs and answer your questions.

Other HSA requirements

In addition to having an HSA-qualified HDHP, the IRS has other strict guidelines for those looking to open and contribute to an HSA.

These are the other requirements to participate in an HSA:

  • Plan participants must have no other health coverage, except for a few types of ancillary coverage. Employees can’t be enrolled in Medicare, TRICARE, or TRICARE for Life
  • Plan participants can’t be claimed as a dependent on someone else's tax return

Contributions and out-of-pocket limits for HSAs and HDHPs

The IRS publishes minimum deductible and maximum medical expense limits annually and they vary depending on if you have self-only or family coverage.

Understanding these terms is important because they apply to the amount you can contribute to an HSA for the year, the minimum deductible for your health insurance plan, and your annual out-of-pocket limits. Your plan will pay 100% of your expenses for in-network medical care when you reach these limits.

The below chart lists the annual HSA contribution limits, the HDHP minimum annual deductible, and the out-of-pocket maximum for 2023:

 

Self-only coverage

Family coverage

HSA contribution limit

(company + employee)

$3,850

$7,750

HSA catch-up contributions

(age 55+)

$1,000

$1,000

HDHP minimum annual deductibles

$1,500

$3,000

HDHP out-of-pocket maximums

$7,500

$15,000

Note: Catch-up contributions can be made at any time in the year the participant turns 55.

HSAs and HRAs

Now that we’ve covered the basics of HSAs, let’s go over how they differ from HRAs. In contrast to what we learned about HSAs, with an HRA, employers give their employees a fixed allowance to pay for qualified healthcare expenses and out-of-pocket medical costs. Once the purchased item is approved, the employee is reimbursed on a tax-free basis.

Employees don’t contribute any of their own money to the HRA—employers will reimburse their employee for the full amount of an incurred expense up to the defined allowance amount. HRAs also stay with the employer when an employee leaves instead of going with the employee and never expiring.

Can I have an HRA and an HSA at the same time?

You can boost your HSA and give your employees flexible spending options by combining it with an HRA. However, there are specific rules that have to be followed to use both at the same time.

The easiest way to incorporate an HRA is with a limited-purpose HRA, which allows your employees to save for future medical expenses. But it can’t reimburse any costs associated with the employee’s HDHP deductible. For example, a qualified small employer HRA (QSEHRA) is compatible with an HSA, but only if it’s a premium-only QSEHRA.

Similarly, an individual coverage HRA (ICHRA) can be compatible with an HSA, but only if you have individual insurance not purchased through an exchange. Additionally, the ICHRA can only reimburse health insurance premiums, not medical expenses, though employees can fund the HSA simultaneously.

Conclusion

HSAs are an increasingly popular choice for employers looking to add value to a group health insurance plan. If you offer a high-deductible plan, the tax advantages of an HSA and the ability to roll over unspent money from year to year are attractive. But an even more complete option could be merging an HSA with an HRA.

While HRAs and HSAs both help keep medical care costs low, they work very differently. If you have questions about aligning your HSA with an HRA, PeopleKeep can help! Simply schedule a call, and we’ll get you started.

This article was originally published on May 21, 2020. It was last updated on December 5, 2022.

1https://www.irs.gov/publications/p969

Originally published on December 5, 2022. Last updated December 5, 2022.
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