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Sub-Sections:HSA-Compatibility
U.S. federal regulations require citizens to have a minimum deductible of $1,100/year ($2,200 for families) on their health insurance from all sources (including HRAs) in order to make tax-deductible contributions to their Health Savings Accounts (HSA). For detailed information on how this affects HRAs, see IRS Ruling 2004-45.GroupHRA automatically makes every HRA participant HSA-eligible by allowing employees to raise (just) their own individual deductible to this level while still receiving lower- or no-deductible HRA coverage for HSA-allowed first-dollar eligible items such as accident coverage or preventative expenses.
By electing an GroupHRA's HSA-Compatibility Deductible, you are telling your HRA Claim Processor, until you meet your HSA-Compatibility Deductible for the current year, to only approve reimbursement for expenses eligible for first-dollar coverage with an HSA. These expenses include
- Health insurance premiums
- Wellness/preventative care (e.g. checkups, mammograms, smoking cessation, weight loss)
- Expenses resulting from accidents
- Dental expenses
- Vision expenses
You should consult with your HSA financial institution or tax advisor before electing HSA-Compatibility for your HRA. In general, if you have an HSA and contemplate making or receiving an HSA contribution in the following calendar year, you should turn on HSA Compatibility prior to January 1 and plan to leave it on throughout the next calendar year.
If, during the next calendar year you have an unforeseen medical expense and/or financial hardship, you can turn off HSA Compatibility and immediately begin receiving a higher level of HRA benefits (and not be able, for that year only, to make or receive tax-free HSA contributions).
Note that you may still keep your existing HSA(s), and accumulate interest/dividends tax-free, even if you do (or did) not have HSA-qualified health coverage throughout the calendar year. IRS regulations only require you to have or have had HSA-qualified coverage to make new tax-deductible (or receive employer tax-free) HSA contributions in a given calendar year.
Example 1: John is single, with no dependents, and has an HSA. Because he wants to deduct his planned $1,500 2009 HSA contribution for his 2009 taxes, he activates an HSA-Compatibility Deductible of $1,150 on 12/31/08 During 2009 John is healthy and submits claims totaling $1,455 for dental, vision, annual checkup, and preventative medicine for which he is reimbursed 100% from his HRA. He incurs no expenses that apply to his $1,150 deductible. John does not remove his “HSA Compatibility” option during 2009 and contributes $1,500 to his HSA in 2009.
Example 2: Same facts as in Example 1, except that on 9/15/09 John decides to have outpatient surgery on 10/1/09 costing $1,800. Because he has an HSA with a $1,150 deductible, John will have to pay $1,150 of the $1,800 surgery; only $700 will be reimbursed from his HRA.
John pays 40% of his income in taxes: 33% for Federal income taxes and 7% for state income taxes. Deducting his $1,500 HSA contributions saves him $600 in taxes ($1,500 x 40%). Thus, he will save $1,300 ($700 in HRA reimbursement plus $600 in taxes).
But, if he doesn’t deduct the contribution to his HSA, then he can obtain $1,800 from his HRA. Because he will receive $500 more ($1,800-$1,300), and he does not believe he will be get additional money from his HRA in the future, John elects to remove the HSA Compatibility option.