HSA eligibility for FSA and HRA participants.

• Author: O'Driscoll, David
• Position: Health savings accounts, flexible spending arrangements, health reimbursement arrangements

A recent ruling clarifies an individual's Sec. 223 eligibility to make HSA contributions in various situations in which the individual is covered by a high-deductible health plan (HDHP) and also by a health flexible spending arrangement (FSA) or a health reimbursement arrangement (HRA).

Situation 1: A is an individual covered by an HDHP, with an 80/20% coinsurance feature above the deductible. He is also covered by a health FSA under a Sec. 125 cafeteria plan and an HRA that meets Notice 2002-45 requirements. The health FSA and HRA pay or reimburse all Sec. 213(d) medical expenses not covered by the HDHP (such as copayments, coinsurance, expenses not covered due to the deductible and other medical expenses not covered by the HDHP).The health FSA and HRA coordinate the benefit payments under Notice 2002-45's ordering rules. A is not entitled to benefits under Medicare and may not be claimed as a dependent on another person's return.

In Situation 1, A is covered by an HDHP, a health FSA and an HRA that pay or reimburse medical expenses incurred before A satisfies the minimum annual deductible under Sec. 223(c)(2)(A)(i). The FSA and HRA pay or reimburse medical expenses not limited to the exceptions for permitted insurance, permitted coverage or preventive care under Sec. 223(c)(1)(B). Thus, A is not an eligible individual for the purpose of making HSA contributions. The result is the same if he is covered by a health FSA or HRA sponsored by his spouse's employer (Rev. Rul. 2004-38).

Situation 2: The facts are the same as in Situation 1, except that the FSA and HRA are limited-purpose arrangements that pay or reimburse, pursuant to the written plan document, only vision and dental expenses (whether or not A satisfies the minimum annual deductible). In addition, the FSA and HRA pay or reimburse preventive care benefits, as described in Notice 2004-23.

In Situation 2, A is covered by an HDHP, a health FSA and an HRA that pay or reimburse medical expenses incurred before A satisfies the minimum annual deductible under Sec. 223(c)(2)(A)(i). However, the medical expenses paid or reimbursed by the health FSA and HRA include only vision and dental benefits (which are permitted coverage) and preventive care. All of these benefits may be covered as a separate health plan, as a separate or optional rider, or as part of the HDHP, whether or not the individual satisfies the Sec. 223(c)(2)(A)(i) minimum annual deductible. Thus, A is an eligible individual...