Seyfarth Synopsis: On June 25, 2021, the IRS released two information letters related to health savings accounts (“HSAs”) and high deductible health plans (“HDHPs”) addressing: (i) correction of excess employer contributions to an HSA, and (ii) how coupons, such as prescription drug coupons, apply toward the HDHP minimum annual deductible and what benefits can be provided before that deductible is met.
Below is a short summary and the key takeaways for each letter.
The taxpayer requested assistance addressing an excess contribution to his HSA, obtaining a corrected Form 5948-SA (an information return reporting contributions to an HSA and other financial vehicles), and rectifying alleged mismanagement of his HSA by the custodian. The letter explains, in turn, that:
(i) employers inadvertently contributing more than the annual maximum may either (1) correct the error by asking the custodian to return the excess contribution to the employer or (2) if the excess is not returned, include the excess contribution as wages on the employee’s Form W-2;
(ii) the account holder should contact the custodian to obtain a corrected Form 5948-SA; and
(iii) HSAs may be governed by ERISA and if so, account holders should contact the Department of Labor for information about applicable fiduciary responsibilities.
(1) under some circumstances, employers are permitted to undo contribution errors despite the usual non-forfeitability of HSA contributions (this confirmed existing IRS guidance); and
(2) while most employers design their HSA programs to avoid ERISA, there are situations in which ERISA can apply. In those situations where ERISA does apply, questions about mismanagement of the HSA should be addressed under the ERISA fiduciary provisions.
The taxpayer asked (i) how coupons and rebates affect an HDHP deductible, and (ii) whether medical services covered by the HDHP pursuant to a state mandate are exempt from the HDHP deductible. While the first issue has been the subject of debate, the IRS affirmed its previously-published position that, for HSA/HDHP purposes, only actual medical expenses count toward the HDHP deductible. For example, if an individual presents a coupon at the pharmacy reducing the price of a covered drug from $1,000 to $600, the amount credited toward the HDHP deductible is only $600 because that is the actual expense the individual incurred.
Second, the IRS averred that state insurance law mandates have no effect on HDHP rules. HDHP rules require the covered individual to satisfy the minimum HDHP deductible before the plan can cover any benefits other than preventive care. The relevant definition of “preventive care” is under Code Section 223. For example, assume a state requires insured plans to cover male contraception and sterilization services without cost sharing. Because these services would not be “preventive care” under Code Section 223, a plan that covers these services before an individual satisfies the minimum deductible for an HDHP would not constitute an HDHP, regardless of whether the coverage of such benefits is required by state law.
(1) HDHP/HSA participants can use drug coupons and discounts, provided that the value of the coupon or discount does not count towards the HDHP minimum deductible.
(2) While insured HDHPs must cover certain benefits under applicable state laws, those benefits may not be covered without cost-sharing that is otherwise applicable to non-preventive services before the deductible is met.
Important Note: IRS information letters do not contain an analysis of all of the potentially relevant facts and other applicable laws. For example, Letter 2021-0008 did not mention the 6% excise tax on excess contributions to HSAs if they are not timely distributed before the account holder’s federal income tax return filing deadline. Therefore, be sure to contact your Seyfarth Employee Benefits attorney to ensure you are compliant.
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