- Internal Revenue Services Provides Additional Guidance on Health Savings Accounts
- April 22, 2004
- Law Firm: Winston & Strawn LLP - Chicago Office
Earlier this year, in Notice 2004-2, the Internal Revenue Service published its initial guidance on health savings accounts, or "HSAs." The IRS recently followed up with four additional items of guidance.
1. In Revenue Ruling 2004-38, the IRS addressed the situation of an individual who was covered by both a high deductible health plan ("HDHP") and a separate prescription drug plan (or rider) that provided benefits before the minimum annual deductible of the HDHP has been satisfied. The IRS concluded that the individual is not an "eligible individual" for purposes of an HSA, and may not make a contribution to an HSA because of the prescription drug coverage. The IRS explained that this result is the same if the prescription drug benefit is provided as a benefit under a health plan (and not separately) or as a benefit for the individual under the plan of his or her spouse. (If a separate prescription drug plan (or rider) did not provide benefits until the minimum annual deductible of the HDHP has been satisfied, or the prescription drug plan is part of an HDHP and subject to the minimum annual deductible, then the individual is an eligible individual and may contribute to an HSA.)
2. The IRS in Revenue Procedure 2004-22 provided transitional relief through the end of 2005 for those individuals covered by both a HDHP and by a separate plan or rider that provides prescription drug benefits before the minimum annual deductible of the HDHP is satisfied, notwithstanding Revenue Ruling 2004-38.
3. The IRS also provided transitional relief under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MPDIMA") in Notice 2004-25. In Notice 2004-2, the IRS had concluded that qualified medical expenses must be incurred after the HSA has been established. However, in Notice 2004-25, the IRS announced that an HSA established by an eligible individual on or before April 15, 2005 may pay or reimburse on a tax-free basis on otherwise qualified medical expenses if the qualified medical expense was incurred on or after the later of (i) January 1, 2004, or (ii) the first day of the first month that an individual becomes an "eligible individual".
4. Finally, in Notice 2004-23, the IRS provided a safe harbor for preventive care benefits, which a HDHP may provide without violating the Code's minimum deductible requirement. The list includes:
- periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals
- routine pre-natal and well-child care
- child and adult immunizations
- tobacco cessation program
- obesity weight loss program
- list of screening services
However, preventive care does not generally include any service or benefit intended to treat an existing illness, injury, or condition. Also, with respect to state law health care requirements, the determination of whether health care that state law requires to be provided by an HDHP without regard to a deductible is "preventive" for purposes of the exception, will be based on the standards set forth in IRS guidance, rather than the characterization by state law.
The IRS guidance on HSAs is clearly a work in progress, with a number of questions remaining to be answered, not all of which are within the bailiwick of the IRS, e.g., the extent to which HSAs are subject to the HIPAA privacy requirements. Nonetheless, the incremental guidance is beneficial in allowing employers to make informed choices about the manner in which health benefits should be funded.