• Summary of IRS Notice 2008-59 Providing Updated Guidance Regarding Health Savings Accounts
  • September 3, 2008 | Authors: Timothy R. McTaggart; Andrew C. Maher
  • Law Firms: Pepper Hamilton LLP - Washington Office ; Pepper Hamilton LLP - Philadelphia Office
  • The Treasury Department and the Internal Revenue Service released Notice 2008-59 on June 25, 2008. Notice 2008-59 provides answers to 42 questions clarifying and illustrating rules regarding Health Savings Accounts (HSAs) as they relate to eligible individuals, high deductible health plans (HDHPs), contributions, distributions, prohibited transactions, establishing an HSA and HSA administration. Notice 2008-59 responds to questions which have arisen regarding HSAs since the IRS last provided guidance in 2004 with Notice 2004-2 and Notice 2004-50. Below is a summary of key issues discussed in Notice 2008-59.

    Eligible Individuals

    A “post-deductible” Health Reimbursement Arrangement (HRA) or Health Flexible Spending Account (FSA) (which is an HRA or FSA that reimburses expenses only after the minimum HDHP deductible has been met) can reimburse health plan premiums and still be compatible with an HSA, even if those premiums pay for non-HDHP coverage and also can reimburse qualified expenses that fall below an HDHP’s umbrella deductible covering an individual, provided that the individual’s deductible meets the statutory minimum.

    Use of an employer’s on-site medical clinic will not disqualify employees from HSA participation as long as the clinic does not provide “significant” medical services. Medical services outside the scope of “significant” include physicals, immunizations, allergy shots, nonprescription pain relievers and treatment for injuries occurring at the job site.

    An employee who has family coverage is still eligible for an HSA even though one or more of the covered participants may have other non-HDHP coverage (e.g., through a spouse’s employer).

    High Deductible Health Plans

    An individual may switch from a family HDHP to a self-only HDHP. To do so, the individual may use “any reasonable method” to allocate the covered expenses incurred during the time he or she was still covered by the family HDHP to satisfy the deductible for self-only HDHP coverage. Each expense must be allocated on a “reasonable and consistent basis.” With the exception of COBRA continuation coverage, each expense must be allocated to one individual.

    HDHPs are subject to out-of-pocket maximums. Some HDHPs will have a separate, higher deductible for specific benefits (e.g., substance abuse treatment). Any “post-deductible” expenses that are paid by the employee to satisfy the specific benefit deductible do not count toward the out-of-pocket maximum.

    An HDHP must provide significant benefits. Therefore, a hospitalization or in-patient care only plan is not an HDHP.


    Employers can contribute to an HSA after December 31 and allocate that contribution to the prior year as long as they do so before April 15 of the subsequent year and notify the HSA custodian about the allocation.

    Employers have a limited ability to recoup their contributions to an employee’s HSA. They may recoup contributions made to accounts that are never established by the employee or when the contributions exceed the maximum allowed. However, an employer may not recoup amounts it contributes after an employee loses HSA eligibility.

    Employer contributions to the HSA of an employee’s spouse are not excluded from the employee’s gross income and wages. Any contribution by an employer to the HSA of a non-employee must be included in the gross income and wages of the employee.


    An HSA may provide a debit card that restricts payments and reimbursements to health care that may be used with an HSA as long as the funds in the HSA are otherwise available to the account holder by way of online transfers, ATM withdrawals or by written check. Employers must notify employees that other access to funds is available.

    Prohibited Transactions

    An HSA account holder may not use an HSA balance as security for a loan. A separate line of credit that is not secured by the HSA is permissible as long as the HSA is not used to repay the line of credit.

    If an employee engages in a prohibited transaction, his or her HSA is immediately disqualified, and the balance is taxed and subject to a 10 percent penalty for the taxable year of the prohibited transaction. If the prohibited transaction is the employer’s fault, the employer is liable for the penalty, but the employee is not.

    Establishing an HSA

    When an HSA is deemed established is determined under state law. But, if the HSA is established by rolling over funds from an old HSA or Archer Medical Savings Account (MSA), the establishment date on the account is the date when the old HSA or MSA was deemed established.

    If an account holder closes an HSA by a withdrawal of all funds in the account and then establishes a second HSA, the second HSA, if it is established within 18 months of the closing of the first HSA, is deemed to be established when the first HSA was established.

    HSA Administration

    HSA administration and maintenance fees withdrawn by the administrator are reflected on Form 5498-SA in the fair market value of the HSA at the end of the taxable year. These fees are not reported as HSA distributions.

    Pepper Points: Notice 2008-59 clarifies a number of issues regarding HSAs that will be of interest to entities that offer or administer HSAs, or contemplate doing so. The IRS guidance in Notice 2008-59 should be read in light of the type of HSA offered or administered, the features of the HSA, how the HSA is administered and the types of account holders participating in the HSA. HSA sponsors and administrators also should familiarize themselves with applicable state laws and regulations that also may provide guidance regarding how an HSA should be operated and administered.