Which Coverage Doesn't Disqualify You from Contributing to a Health Savings Account?

This column is an excerpt (Question 14) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and a citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: I’m covered on a dental or vision plan. Am I still HSA-eligible?

Answer: Yes. You can maintain certain coverage without losing your eligibility to open and fund a Health Savings Account. The list of permitted coverage includes:

• Dental coverage (insurance or discount card)
• Vision coverage (insurance or discount card)
• Critical illness coverage (a policy that pays a fixed amount of money directly to you if you’re diagnosed with a covered critical illness, such as cancer or heart disease)
• Hospital coverage (a policy that pays a fixed amount to you for each hospitalization or day of hospitalization for a fixed number of days)
• Accident coverage (a policy that pays a fixed amount directly to you for accidents such as a broken bone or loss of the function of a limb)
• Short-term and long-term disability coverage (which pay you a predetermined amount to replace your lost income, rather than reimburse medical claims directly)
• Long-term care insurance (which pays for room and board in a long-term care facility such as a nursing home)

In addition, if you incur medical expenses that another party is required to pay (such as through a homeowners, business, or motor vehicle insurance policy, or as the result of a successful lawsuit), you don’t lose your eligibility, even if these payments reduce your net financial responsibility below the statutory minimum annual deductible.

Example: You’re injured in a motor vehicle accident caused by another driver. Either your or the other driver’s auto insurance pays the first $2,000 of your medical expenses. This amount covers your treatment, which was subject to your deductible of, say, $2,500. You’re not disqualified from funding your Health Savings Account for the year even though your net deductible responsibility after the auto-insurance payment (the remaining $500) is less than the statutory minimum annual deductible for an HSA-qualified plan.

IRS Notice 2004-2:

Q-6. What other kinds of health coverage may an individual maintain without losing eligibility for an HSA?

A-6. An individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage for any benefit provided by “permitted insurance.” Permitted insurance is insurance 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 (e.g., automobile insurance), insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization.

In addition to permitted insurance, an individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. If a plan that is intended to be an HDHP is one in which substantially all of the coverage of the plan is through permitted insurance or other coverage as described in this answer, it is not an HDHP.

See Internal Revenue Code Section 223(c)(1)(B) and Section 223(c)(3).

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.

HSA Question of the Week is published every week, alternating every other Wednesday with HSA Wednesday Wisdom and every other Monday with HSA Monday Mythbuster.