• Internal Revenue Service Issues Guidance on the Interrelationship between Health Savings Accounts, Health Reimbursement Accounts, and Health Flexible Spending Accounts
  • June 11, 2004
  • Law Firm: Winston & Strawn LLP - Chicago Office
  • With the advent of health savings accounts ("HSAs") in 2004, many employers are faced with the task of integrating the arrangements into existing health care arrangements such as health reimbursement accounts ("HRAs") and health flexible spending accounts ("health FSAs"). In Revenue Ruling 2004-45, the IRS published its initial guidance in this area, addressing a variety of fact patterns with different types of HRAs and FSAs.

    The IRS looked to the legislative history of Section 223 of the Internal Revenue Code added by the Medicare Prescription Drug Improvement and Modernization Act of 2003 which provides that "eligible individuals for HSAs are individuals who are covered by a high deductible health plan ['HDHP'] and no other health plan that is not a high deducible health plan." However, an individual with other coverage in addition to a HDHP is still eligible to participate in a HSA if such other coverage is certain permitted insurance or permitted coverage. Code Section 223 also provides a safe harbor for the absence of a preventive care deductible.

    Applying these general principles, the IRS concluded that since a health FSA and an HRA are health plans and constitute other coverage under Code Section 223(c), as a general rule, an individual who is covered by an HDHP and a health FSA or HRA that reimburses or pays medical expenses will not generally be an eligible employee for purposes of making contributions to an HSA. However, the IRS then set forth certain types of arrangements that both individually and in combination are exceptions to the general rule:

    • A limited purpose health FSA that pays or reimburses preventive care benefits.

    • A limited purpose health FSA that reimburse or pays benefits for permitted insurance (but not through insurance or for long-term care services).

    • A limited purpose HRA that pays or reimburse benefits for permitted insurance or permitted coverage (but not for long term care service).

    • A suspended HRA, pursuant to an election made before the beginning of the HRA coverage period, that does not pay, or reimburse, at any time, any medical expense incurred during the suspension period (other than preventive care, permitted insurance or permitted coverage). This exception would allow individuals who already have HRAs to establish HSAs, without losing the balance that they have accumulated in their HRAs.

    • A post-deductible health FSA or HRA that does not pay or reimburse any medical expense incurred before the minimum annual deductible under Code Section 223(c)(2) is satisfied. While the deductible for the HSA or HRA need not be the same as the deductible for the HDHP, the individual is an eligible individual for HSA purposes so long as neither the HDHP nor the HRA or health FSA provides benefits before the minimum annual deductible is satisfied.

    • A retirement HRA that pays or reimburses only those medical expenses incurred after retirement (and no expenses incurred before retirement). In such case, the individual is an eligible individual for purposes of making contributions to the HSA before retirement, but loses eligibility for coverage periods when the retirement HRA pays and/or reimburses medical expenses. Consequently, after retirement, the individual is no longer an eligible individual for purposes of the HSA.

    The IRS also indicated that while an individual may not be reimbursed for the same medical expense by more than one health arrangement, if an individual has available all three of the arrangements, then the health FSA or HRA may pay or reimburse the medical expenses, so long as the individual certifies to the employer that the expense has not been reimbursed and that the individual will not seek reimbursement under any other plan or arrangement covering that expense, including a HSA.