HSA eligibility for FSA and HRA participants.

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 for the purpose of making contributions to an HSA.

Situation 3: The facts are the same as in Situation 1, except that A is not covered by a health FSA. Under the employer's HRA, A elects, before the beginning of the HRA coverage period, to forgo the payment or reimbursement of medical expenses incurred during that coverage period. This decision does not apply to permitted insurance, permitted coverage and preventive care ("excepted medical expenses"); see Sec. 223(c)(1)(B) and Notice 2004-23. Medical expenses incurred during the suspended HRA coverage period (other than the excepted medical expenses, if otherwise allowed to be paid or reimbursed by an HRA), cannot be paid or reimbursed by the HRA currently or later (i.e., after the HRA suspension ends). However, the employer decides to continue to make employer contributions to the HRA during the suspension period and, thus, the maximum available amount under the HRA is not affected by the suspension, but is available for the payment or reimbursement of the excepted medical expenses incurred during the suspension period, as well as medical expenses incurred in later HRA coverage periods.

In Situation 3, A is an eligible individual for the purpose of making HSA contributions until the suspension period ends and is again entitled to receive, from the HRA, payments or reimbursements of Sec. 213(d) medical expenses incurred after the suspension period.

Situation 4: The facts are the same as in Situation 1, except that the health FSA and HRA are post-deductible arrangements that only pay or reimburse medical expenses (including the individual's 20% coinsurance responsibility for expenses above the deductible) alter the minimum annual deductible of the HDHP is satisfied.

In Situation 4, A is an eligible individual for the purpose of making HSA contributions, because the health FSA and HRA pay or reimburse medical expenses only after the HDHP's minimum annual deductible is satisfied.

Situation 5: The facts are the same as in Situation 1, except that A is not covered by a health FSA. The employer's HRA is a retirement HRA that only reimburses medical expenses incurred after the individual retires.

In Situation 5, A is an eligible individual for the purpose of making HSA contributions before retirement, because the HRA will pay or reimburse only medical expenses incurred after retirement.

REV. RUL. 2004-45, IRB 2004-22