Summary of Notice 2008-59 Guidance on Health Savings Accounts
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The Treasury Department and the Internal Revenue Service released Notice 2008-59 on June 25, 2008. A summary of the Notice is included here.
Eligible Individuals
An individual remains eligible for an HSA when participating in a limited HRA that reimburses accident and health plan premiums in addition to vision, dental and preventive care services.
An individual is ineligible for an HSA if they are covered by an HDHP and by other coverage that is a non-HDHP that is not considered "disregarded coverage" or "preventive care" under the regulations.
An individual is ineligible for the HSA if their employer pays or reimburses directly or indirectly some or all of the employee's medical expenses incurred before the minimum HDHP deductible is satisfied.
An individual does not fail to be an eligible individual merely because the HDHP includes an embedded deductible that is no less than the statutory minimum family HDHP deductible.
A post-deductible HRA or post-deductible FSA may reimburse qualified medical expenses of an individual with family HDHP coverage incurred any time after the minimum family deductible is met.
An individual eligible for, but not enrolled in Medicare (Parts A, B or D), remains eligible for the HSA. Once the individual becomes enrolled in Medicare (Parts A, B or D), they are no longer eligible for the HSA.
An individual enrolled in a qualified HDHP and also covered by a health plan that is not an HDHP with a deductible equal to or greater than the statutory minimum HDHP deductible remains an eligible individual as long as the deductible for the other coverage equals or exceeds the statutory minimum HDHP deductible.
An individual with family HDHP coverage who is also enrolled in a post-deductible HRA or post-deductible FSA will become ineligible for the HSA if the post-deductible HRA or post-deductible FSA reimburses qualified medical expenses of a spouse or dependent incurred before the minimum family HDHP deductible has been satisfied.
An individual is eligible for the HSA if they receive medical care from the Department of Veterans Affairs (VA) that is limited to disregarded coverage or preventive care, even if the disregarded coverage or preventive care is provided within the previous three months.
An individual is eligible for the HSA even if they receive access to free health care or health care at charges below fair market value from a clinic on an employer's premises as long as the clinic does not provide "significant benefits in the nature of medical care" in addition to disregarded coverage or preventive care. If "significant benefits" are provided, the individual will become ineligible for the HSA.
An individual remains eligible for the HSA if they have family HDHP that covers dependents and those dependents have other, disqualifying non-HDHP coverage.
High Deductible Health Plans
If an individual switches from a family HDHP to a self-only HDHP, the individual may use "any reasonable method" to allocate the covered expenses incurred during the period of family coverage for the purpose of satisfying the deductible for self-only coverage. Examples provided in the Notice include: allocating only expenses incurred by the individual; allocating expenses incurred during the family coverage on a per capita basis according to the number of persons covered by the family HDHP. If the family deductible was satisfied before the change to self-only coverage, the plan may treat the individual as having satisfied the self-only deductible for that plan year. In all cases, each expense must be allocated on a "reasonable and consistent basis" and, except in the case of COBRA continuation coverage, each expense may be allocated to only one individual and the plan year must be 12 months. See Notice 2004-50 Q&A 23 for information related to individuals switching from self-only HDHP coverage to family HDHP coverage.
A health plan is not an HDHP if the health plan restricts benefits to expenses for hospitalization or in-patient care.
Only medical expenses described in Section 213(d) and covered by the HDHP may be taken into account when determining whether the HDHP deductible, or the minimum deductible in Section 223(C)(2)(A)(i), has been satisfied.
Contributions
When an individual has family HDHP coverage for the entire family, and the spouse and dependents also have other non-HDHP coverage, including Medicare or Medicaid, the eligible individual may contribute to the HSA the statutory maximum allowed for family coverage. The other coverage of dependent children or spouse does not affect the individual's contribution limit, except that if the spouse is covered by non-HDHP coverage, no part of the HSA contribution can be allocated to the spouse.
If the husband and wife are both eligible individuals and one has self-only HDHP coverage and the other has family HDHP coverage (or they each have family HDHP coverage), the maximum annual contribution to the HSA is the statutory maximum for family coverage. The contribution limit is divided between the spouses by agreement.
An individual who ceases to be an eligible individual during the year may, until the date for filing the return (without extensions), make HSA contributions for the months of the year when the individual was an eligible individual. The maximum contribution would be the statutory maximum prorated for the months during which the individual was eligible.
An individual who is no longer eligible for the HSA who has an existing HSA may rollover the existing HSA into a new HSA.
If a husband and wife are each eligible to contribute catch-up contributions, they must do so by contributing to his or her own HSA.
Employer Contributions
Employer contributions (including salary reduction contributions) to an employee's HSA made between January 1 and the date for filing the employee's return without extensions, may be allocated to the prior year. The employer is required to notify the HSA administrator or custodian the contributions are for the prior year. The contributions are reported in box 12 with code W on the employees' Form W-2 for the year in which the contributions are actually made. Employees have a responsibility to ensure to report the contributions correctly with their tax return using Form 8889. Below is an example included in Notice 2008-59:
~~In January 2009, Employer K contributes $500 to each employee's HSA and notifies the HSA trustee (and provides a statement to the employees) that the contributions are for 2008. Subsequently, in 2009, Employer K contributes $250 to each employee's HSA on March 31, June 30, September 30 and December 31 (totaling $1,000). For each employee whose HSA received these contributions, Employer K reports a total contribution of $1,500 in box 12 with code W on the Form W-2 for 2009.~~
~~In completing the Form 8889 for 2008, to compute Employer K's contributions, the employees add the $500 to any employer contributions reported in box 12, code W on the 2008 Form W-2. In completing the Form 8889 for 2009, the employees subtract the $500 from the box 12 code W amount on the 2009 Form W-2 and add to the remaining $1,000 any contributions for 2009 made by Employer K between January 1, 2009 and his or her filing date without extensions.~~
An employer that contributes to an HSA for an individual who was never eligible for the HSA may correct the error. At the employer's option, the employer may request the custodian return the amounts to the employer. The employer must recover the amounts by the end of the taxable year, or be required to include the amount as gross income and wages on the employee's Form W-2 for the year during which the employer made the contributions.
An employer that contributes amounts in error to an employee's HSA that exceed the maximum annual contribution, may correct the error. At the employer's option, the employer may request the custodian return the amounts to the employer. The employer must recover the amounts by the end of the taxable year, or be required to include the amount as gross income and wages on the employee?s Form W-2 for the year during which the employer made the contributions.
An employer may not recoup any amount that it contributes in error to an employee's HSA when the amounts are less than or equal to the maximum annual contribution.
An employer that contributes to the HSA of an employee who ceases to be an eligible individual during the year cannot recoup the amounts from the HSA unless the amount contributed in error exceeds the maximum annual contribution.
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, including salary reduction amounts made through a cafeteria plan, must be included in the gross income and wages of the employee.
Distributions
A debit card that restricts payments and reimbursements to health care may be used with an HSA as long as the funds in the HSA are otherwise readily available, such as through online transfers or withdrawals, withdrawals from an ATM or check writing. Employers must notify employees that other access to funds is available.
An HSA account beneficiary may authorize someone other than themselves to withdraw funds from their HSA.
Medicare Part D premiums for the account beneficiary, the account beneficiary's spouse or the account beneficiary's dependents are qualified medical expenses if an account beneficiary has attained age 65. If the account beneficiary has not attained age 65, Medicare premiums are not qualified medical expenses.
COBRA premiums for the spouse or dependent of an account beneficiary are considered a qualified medical expense.
Insurance premiums for a spouse or dependent during the time the spouse or dependent are receiving unemployment compensation under federal or state law are considered an eligible expense.
Medical expenses incurred by an account beneficiary?s child who is claimed as a dependent by the account beneficiary's former spouse are qualified medical expenses for the HSA.
Prohibited Transactions
A loan from an HSA is a prohibited transaction and not allowed.
An account beneficiary may not pledge his or her HSA as security for a loan.
Any direct or indirect extension of credit between the account beneficiary and the HSA is a prohibited transaction and not allowed.
A trustee may not loan money to the HSA.
If an account beneficiary engages in a prohibited transaction with his or her HSA, the sanction in general is disqualification of the account. The HSA stops being an HSA as of the first day of the taxable year of the prohibited transaction. The assets of the beneficiary's account are deemed distributed and the appropriate taxes plus the 10% additional tax for distributions not used for qualified medical expenses is applied.
A line of credit to the account beneficiary that is not secured by the account beneficiary's HSA is not a prohibited transaction.
Establishing an HSA
State law determines when an HSA is established. Most state trust laws require that for a trust to exist, an asset must be held in trust. Thus, most state laws require that a trust be funded to be established.
If an HSA is funded by a rollover from an existing Archer MSA or HSA, the date the account is established is the date of the original Archer MSA or HSA.
Administration
HSA administration and maintenance fees withdrawn from the HSA are not considered distributions from the HSA. The fees are reflected on Form 5498-SA in the fair market value of the HSA at the end of the taxable year.
Definitions
Disregarded coverage (Notice 2004-38) includes "permitted insurance" and other specified coverage ("permitted coverage"). "Permitted insurance" is coverage under which substantially all of the coverage provided relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property, insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization. "Permitted coverage" (whether through insurance or otherwise) is coverage for accidents, disability, dental care, vision care or long-term care. Prescription drug benefits are not listed as permitted insurance or as permitted coverage under section 223(c)(1)(B).
Eligible individual means an individual who: (1) is covered by a high deductible health plan (HDHP); (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain types of limited coverage); (3) is not enrolled in Medicare; and (4) may not be claimed as a dependent on another person's tax return. See section 223(c)(1).
Limited-purpose health flexible spending arrangement (FSA) means a health FSA described in a cafeteria plan that only pays or reimburses permitted coverage benefits (as defined in section 223(c)(2)(C)), such as vision care, dental care or preventive care (as defined for purposes of section 223(c)(2)(C)). See Prop. Treas. Reg. section 1.125-5(m)(3).
Limited-purpose health reimbursement arrangement (HRA) means an HRA that only pays or reimburses permitted coverage benefits (as defined in section 223(c)(2)(C)), such as vision care, dental care or preventive care. See Rev. Rul. 2004-45, 2004-1 C.B. 971.
Post-deductible health FSA means a health FSA in a cafeteria plan that only pays or reimburses medical expenses (as defined in section 213(d)) for preventive care or medical expenses incurred after the minimum annual HDHP deductible under section 223(c)(2)(A)(i) is satisfied. No medical expenses incurred before the annual HDHP deductible is satisfied may be reimbursed by a post-deductible FSA, regardless of whether the HDHP covers the expense or whether the deductible is later satisfied. See Prop. Treas. Reg. section 1.125-5(m)(4).
Post-deductible HRA means an HRA that only pays or reimburses medical expenses (as defined in section 213(d)) for preventive care or medical expenses incurred after the minimum annual HDHP deductible under section 223(c)(2)(A)(i) is satisfied. No medical expenses incurred before the annual HDHP deductible is satisfied may be reimbursed by a post-deductible HRA, regardless of whether the HDHP covers the expense or whether the deductible is later satisfied. See Rev. Rul. 2004-45.
Preventive care for purposes of section 223(c)(2)(C) includes, but is not limited to, the following:
Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
Routine prenatal and well-child care.
Child and adult immunizations.
Tobacco cessation programs.
Obesity weight-loss programs.
Screening services (Cancer Screening, Heart and Vascular Diseases Screening, Infectious Diseases Screening, Mental Health Conditions and Substance Abuse Screening, Metabolic, Nutritional, and Endocrine Conditions Screening, Musculoskeletal Disorders Screening, Obstetric and Gynecologic Conditions Screening, Pediatric Conditions Screening, Vision and Hearing Disorders Screening)
Preventive care does not generally include any service or benefit intended to treat an existing illness, injury, or condition
IRS Notice 2008-59
Eligible Individuals
An individual remains eligible for an HSA when participating in a limited HRA that reimburses accident and health plan premiums in addition to vision, dental and preventive care services.
An individual is ineligible for an HSA if they are covered by an HDHP and by other coverage that is a non-HDHP that is not considered "disregarded coverage" or "preventive care" under the regulations.
An individual is ineligible for the HSA if their employer pays or reimburses directly or indirectly some or all of the employee's medical expenses incurred before the minimum HDHP deductible is satisfied.
An individual does not fail to be an eligible individual merely because the HDHP includes an embedded deductible that is no less than the statutory minimum family HDHP deductible.
A post-deductible HRA or post-deductible FSA may reimburse qualified medical expenses of an individual with family HDHP coverage incurred any time after the minimum family deductible is met.
An individual eligible for, but not enrolled in Medicare (Parts A, B or D), remains eligible for the HSA. Once the individual becomes enrolled in Medicare (Parts A, B or D), they are no longer eligible for the HSA.
An individual enrolled in a qualified HDHP and also covered by a health plan that is not an HDHP with a deductible equal to or greater than the statutory minimum HDHP deductible remains an eligible individual as long as the deductible for the other coverage equals or exceeds the statutory minimum HDHP deductible.
An individual with family HDHP coverage who is also enrolled in a post-deductible HRA or post-deductible FSA will become ineligible for the HSA if the post-deductible HRA or post-deductible FSA reimburses qualified medical expenses of a spouse or dependent incurred before the minimum family HDHP deductible has been satisfied.
An individual is eligible for the HSA if they receive medical care from the Department of Veterans Affairs (VA) that is limited to disregarded coverage or preventive care, even if the disregarded coverage or preventive care is provided within the previous three months.
An individual is eligible for the HSA even if they receive access to free health care or health care at charges below fair market value from a clinic on an employer's premises as long as the clinic does not provide "significant benefits in the nature of medical care" in addition to disregarded coverage or preventive care. If "significant benefits" are provided, the individual will become ineligible for the HSA.
An individual remains eligible for the HSA if they have family HDHP that covers dependents and those dependents have other, disqualifying non-HDHP coverage.
High Deductible Health Plans
If an individual switches from a family HDHP to a self-only HDHP, the individual may use "any reasonable method" to allocate the covered expenses incurred during the period of family coverage for the purpose of satisfying the deductible for self-only coverage. Examples provided in the Notice include: allocating only expenses incurred by the individual; allocating expenses incurred during the family coverage on a per capita basis according to the number of persons covered by the family HDHP. If the family deductible was satisfied before the change to self-only coverage, the plan may treat the individual as having satisfied the self-only deductible for that plan year. In all cases, each expense must be allocated on a "reasonable and consistent basis" and, except in the case of COBRA continuation coverage, each expense may be allocated to only one individual and the plan year must be 12 months. See Notice 2004-50 Q&A 23 for information related to individuals switching from self-only HDHP coverage to family HDHP coverage.
A health plan is not an HDHP if the health plan restricts benefits to expenses for hospitalization or in-patient care.
Only medical expenses described in Section 213(d) and covered by the HDHP may be taken into account when determining whether the HDHP deductible, or the minimum deductible in Section 223(C)(2)(A)(i), has been satisfied.
Contributions
When an individual has family HDHP coverage for the entire family, and the spouse and dependents also have other non-HDHP coverage, including Medicare or Medicaid, the eligible individual may contribute to the HSA the statutory maximum allowed for family coverage. The other coverage of dependent children or spouse does not affect the individual's contribution limit, except that if the spouse is covered by non-HDHP coverage, no part of the HSA contribution can be allocated to the spouse.
If the husband and wife are both eligible individuals and one has self-only HDHP coverage and the other has family HDHP coverage (or they each have family HDHP coverage), the maximum annual contribution to the HSA is the statutory maximum for family coverage. The contribution limit is divided between the spouses by agreement.
An individual who ceases to be an eligible individual during the year may, until the date for filing the return (without extensions), make HSA contributions for the months of the year when the individual was an eligible individual. The maximum contribution would be the statutory maximum prorated for the months during which the individual was eligible.
An individual who is no longer eligible for the HSA who has an existing HSA may rollover the existing HSA into a new HSA.
If a husband and wife are each eligible to contribute catch-up contributions, they must do so by contributing to his or her own HSA.
Employer Contributions
Employer contributions (including salary reduction contributions) to an employee's HSA made between January 1 and the date for filing the employee's return without extensions, may be allocated to the prior year. The employer is required to notify the HSA administrator or custodian the contributions are for the prior year. The contributions are reported in box 12 with code W on the employees' Form W-2 for the year in which the contributions are actually made. Employees have a responsibility to ensure to report the contributions correctly with their tax return using Form 8889. Below is an example included in Notice 2008-59:
~~In January 2009, Employer K contributes $500 to each employee's HSA and notifies the HSA trustee (and provides a statement to the employees) that the contributions are for 2008. Subsequently, in 2009, Employer K contributes $250 to each employee's HSA on March 31, June 30, September 30 and December 31 (totaling $1,000). For each employee whose HSA received these contributions, Employer K reports a total contribution of $1,500 in box 12 with code W on the Form W-2 for 2009.~~
~~In completing the Form 8889 for 2008, to compute Employer K's contributions, the employees add the $500 to any employer contributions reported in box 12, code W on the 2008 Form W-2. In completing the Form 8889 for 2009, the employees subtract the $500 from the box 12 code W amount on the 2009 Form W-2 and add to the remaining $1,000 any contributions for 2009 made by Employer K between January 1, 2009 and his or her filing date without extensions.~~
An employer that contributes to an HSA for an individual who was never eligible for the HSA may correct the error. At the employer's option, the employer may request the custodian return the amounts to the employer. The employer must recover the amounts by the end of the taxable year, or be required to include the amount as gross income and wages on the employee's Form W-2 for the year during which the employer made the contributions.
An employer that contributes amounts in error to an employee's HSA that exceed the maximum annual contribution, may correct the error. At the employer's option, the employer may request the custodian return the amounts to the employer. The employer must recover the amounts by the end of the taxable year, or be required to include the amount as gross income and wages on the employee?s Form W-2 for the year during which the employer made the contributions.
An employer may not recoup any amount that it contributes in error to an employee's HSA when the amounts are less than or equal to the maximum annual contribution.
An employer that contributes to the HSA of an employee who ceases to be an eligible individual during the year cannot recoup the amounts from the HSA unless the amount contributed in error exceeds the maximum annual contribution.
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, including salary reduction amounts made through a cafeteria plan, must be included in the gross income and wages of the employee.
Distributions
A debit card that restricts payments and reimbursements to health care may be used with an HSA as long as the funds in the HSA are otherwise readily available, such as through online transfers or withdrawals, withdrawals from an ATM or check writing. Employers must notify employees that other access to funds is available.
An HSA account beneficiary may authorize someone other than themselves to withdraw funds from their HSA.
Medicare Part D premiums for the account beneficiary, the account beneficiary's spouse or the account beneficiary's dependents are qualified medical expenses if an account beneficiary has attained age 65. If the account beneficiary has not attained age 65, Medicare premiums are not qualified medical expenses.
COBRA premiums for the spouse or dependent of an account beneficiary are considered a qualified medical expense.
Insurance premiums for a spouse or dependent during the time the spouse or dependent are receiving unemployment compensation under federal or state law are considered an eligible expense.
Medical expenses incurred by an account beneficiary?s child who is claimed as a dependent by the account beneficiary's former spouse are qualified medical expenses for the HSA.
Prohibited Transactions
A loan from an HSA is a prohibited transaction and not allowed.
An account beneficiary may not pledge his or her HSA as security for a loan.
Any direct or indirect extension of credit between the account beneficiary and the HSA is a prohibited transaction and not allowed.
A trustee may not loan money to the HSA.
If an account beneficiary engages in a prohibited transaction with his or her HSA, the sanction in general is disqualification of the account. The HSA stops being an HSA as of the first day of the taxable year of the prohibited transaction. The assets of the beneficiary's account are deemed distributed and the appropriate taxes plus the 10% additional tax for distributions not used for qualified medical expenses is applied.
A line of credit to the account beneficiary that is not secured by the account beneficiary's HSA is not a prohibited transaction.
Establishing an HSA
State law determines when an HSA is established. Most state trust laws require that for a trust to exist, an asset must be held in trust. Thus, most state laws require that a trust be funded to be established.
If an HSA is funded by a rollover from an existing Archer MSA or HSA, the date the account is established is the date of the original Archer MSA or HSA.
Administration
HSA administration and maintenance fees withdrawn from the HSA are not considered distributions from the HSA. The fees are reflected on Form 5498-SA in the fair market value of the HSA at the end of the taxable year.
Definitions
Disregarded coverage (Notice 2004-38) includes "permitted insurance" and other specified coverage ("permitted coverage"). "Permitted insurance" is coverage under which substantially all of the coverage provided relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property, insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization. "Permitted coverage" (whether through insurance or otherwise) is coverage for accidents, disability, dental care, vision care or long-term care. Prescription drug benefits are not listed as permitted insurance or as permitted coverage under section 223(c)(1)(B).
Eligible individual means an individual who: (1) is covered by a high deductible health plan (HDHP); (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain types of limited coverage); (3) is not enrolled in Medicare; and (4) may not be claimed as a dependent on another person's tax return. See section 223(c)(1).
Limited-purpose health flexible spending arrangement (FSA) means a health FSA described in a cafeteria plan that only pays or reimburses permitted coverage benefits (as defined in section 223(c)(2)(C)), such as vision care, dental care or preventive care (as defined for purposes of section 223(c)(2)(C)). See Prop. Treas. Reg. section 1.125-5(m)(3).
Limited-purpose health reimbursement arrangement (HRA) means an HRA that only pays or reimburses permitted coverage benefits (as defined in section 223(c)(2)(C)), such as vision care, dental care or preventive care. See Rev. Rul. 2004-45, 2004-1 C.B. 971.
Post-deductible health FSA means a health FSA in a cafeteria plan that only pays or reimburses medical expenses (as defined in section 213(d)) for preventive care or medical expenses incurred after the minimum annual HDHP deductible under section 223(c)(2)(A)(i) is satisfied. No medical expenses incurred before the annual HDHP deductible is satisfied may be reimbursed by a post-deductible FSA, regardless of whether the HDHP covers the expense or whether the deductible is later satisfied. See Prop. Treas. Reg. section 1.125-5(m)(4).
Post-deductible HRA means an HRA that only pays or reimburses medical expenses (as defined in section 213(d)) for preventive care or medical expenses incurred after the minimum annual HDHP deductible under section 223(c)(2)(A)(i) is satisfied. No medical expenses incurred before the annual HDHP deductible is satisfied may be reimbursed by a post-deductible HRA, regardless of whether the HDHP covers the expense or whether the deductible is later satisfied. See Rev. Rul. 2004-45.
Preventive care for purposes of section 223(c)(2)(C) includes, but is not limited to, the following:
Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
Routine prenatal and well-child care.
Child and adult immunizations.
Tobacco cessation programs.
Obesity weight-loss programs.
Screening services (Cancer Screening, Heart and Vascular Diseases Screening, Infectious Diseases Screening, Mental Health Conditions and Substance Abuse Screening, Metabolic, Nutritional, and Endocrine Conditions Screening, Musculoskeletal Disorders Screening, Obstetric and Gynecologic Conditions Screening, Pediatric Conditions Screening, Vision and Hearing Disorders Screening)
Preventive care does not generally include any service or benefit intended to treat an existing illness, injury, or condition
IRS Notice 2008-59