President Directs Agencies to Expand HSA and FSA Rules
In an Executive Order issued on June 24, 2019, President Trump directed several agencies to address a number of health care related matters through regulation. This post discusses Section 6 of the Executive Order, which takes aim at Health Savings Accounts (HSAs), health care Flexible Spending Accounts (FSAs), and medical expenses generally.
Health Savings Accounts
HSAs provide a significant three-pronged tax benefit to HSA holders. Dollars may be contributed pre-tax, earnings grow tax-free on the accounts, and account withdrawals are not taxed so long as they are used to pay for qualifying medical expenses.
But there is a catch. Individuals may not participate in an HSA unless they participate in a “High Deductible Health Plan” (HDHP) with deductibles of at least $1,350 for single coverage or $2,700 for family coverage (2019). In addition, individuals may not be covered by any health plan that is not a HDHP. There are some exceptions to this “no other plan” rule, but the exceptions are limited to certain types of non-medical insurance, preventive care, and arrangements that “do not provide significant benefits in the nature of medical care” such as employee assistance (EAP), disease management or wellness plans.
The “no other plan” rule has proven especially challenging for individuals with chronic conditions because, once an illness has manifested, the treatment for that illness does not fall under any exception to “no other plan” rule. Put another way, if an individual has a chronic condition, an HSA-compatible HDHP cannot cover any treatments for that condition until the deductible is satisfied. Many HDHPs have deductibles significantly higher than the minimums described above. This coverage gap often causes individuals to forego maintenance of their chronic conditions, sometimes with dire health consequences.
The Executive Order directs the Secretary of the Treasury to address this issue. Specifically, within 120 days of the Executive Order, the Secretary is directed to “expand the ability of patients to select high-deductible health plans that can be used alongside a health savings account, and that cover low-cost preventive care, before the deductible, for medical care that helps maintain health status for individuals with chronic conditions.” This expansion will likely modify the “no other plan” rule to permit pre-deductible coverage of certain treatments for chronic conditions, welcome news for plan participants seeking to manage those conditions.
Health Care Flexible Spending Accounts
FSA arrangements permit individuals to contribute pre-tax dollars towards FSA accounts, which may be used to pay for certain medical expenses not covered by their medical, dental and vision plans. Generally, these contributions are subject to a “use it or lose it” rule, whereby funds not used within a year are forfeited. The “use it or lose it” rule creates challenges for individuals who, for one reason or another, cannot accurately forecast the coming year’s medical expenses. In 2013, the IRS softened the “use it or lose it” rule to allow a $500 carryover per year. The Executive Order directs the Secretary of the Treasury, within 180 days of the date of the Executive Order, to increase this $500 carryover allotment. This development is welcome news to individuals who do not always exhaust their FSA accounts as anticipated.
Eligible Medical Expenses
Section 213(d) of the Internal Revenue Code generally describes which medical expenses taxpayers may exclude from income. The 213(d) definition is used for several other purposes, including as the general basis for the set of medical expenses reimbursable from HSA and FSA accounts.
The Executive Order directs the Secretary of the Treasury, within 180 days of the date of the Executive Order, to propose regulations to expand the Section 213(d) definition to include “expenses related to certain types of arrangements, potentially including direct primary care arrangements and healthcare sharing ministries.” While it remains to be seen exactly now the Secretary will define these arrangements, this expansion will be welcome news to individuals who wish to use their HSA and FSA accounts for additional expenses or deduct additional expenses from income.
What to do now
Employers are encouraged to keep an eye out for guidance addressing these issues and be prepared to consider changes to benefit plan designs and documents.