In part one of this series, we covered the health savings account (HSA) from a high level. We learned it is a special tax-exempt account that we can use to pay medical expenses. This packs a pretty nice punch. But there are other things to consider and rules to follow before you can join Max’s HSA cult.
In part two, we went over the risk the IRS expects us to take on in exchange for access to the health savings account. The high deductible health plan (HDHP) coverage creates that risk for us. I consider having medical coverage through an HDHP the first and most important requirement in becoming eligible for HSA contributions. Most of us turn to our employer to get this type of health plan.
But there are a few other things we need to keep an eye on to make sure we remain eligible for contributions.
Qualifying for a Health Savings Account
I mentioned the Internal Revenue Service (IRS) outlines four relatively simple criteria we need to meet to be able to open and contribute to a health savings account. There is one thing we must do, and three things we cannot do.
Publication 969 outlines these. I paraphrased those requirements below and, like most things with the IRS, these are non-negotiable. We already covered the first one in detail.
- You must be covered under a high deductible health plan
- You cannot have any other health coverage
- You cannot be enrolled in Medicare
- You cannot be claimed as a dependent on someone else’s return
If we can pass this test, we become what the IRS calls an “eligible individual” and qualify for an HSA. The IRS throws around this term “eligible individual” more than 50 times in publication 969.
I think these are pretty straightforward rules, but we do need to dig a bit deeper. I like to avoid getting hit on technicalities when I can.
No Other Health Coverage Allowed
Make sure that you do not have any additional health/medical coverage. This goes for your spouse as well if you are covering him or her under family HDHP coverage. In my world, we sometimes call this “secondary” coverage.
It’s rare, but it does come up.
For example, let’s say one spouse (Laura) works for an employer who offers a non-high deductible health plan through Anthem. If Laura inadvertently signs up her spouse (Will) who is already covered through a Cigna high deductible health plan with a health savings account option through his own employer, we have a problem. Laura’s mistake would make Will ineligible for health savings account contributions.
I think this could also come up during a job change where insurance from the old employer potentially overlaps coverage with the new employer. If one of the plans is non-high deductible, we might have a problem.
Additionally, an employee covered under an HDHP that has a flexible spending account (FSA) or health reimbursement account (HRA) usually can’t also make contributions to a health savings account (HSA). I suppose the IRS considers that double-dipping. There are a few loopholes surrounding this that we will review in another post, but the bottom line is be cautious if you have an FSA or HRA.
Other Health Coverage Exceptions
Of course, the IRS does lay out some exceptions for other insurance benefits. Those are generally surrounding coverage related to workers’ compensation, coverage for a specific disease or illness, and some insurance plans that might pay out a fixed amount for each day you are in the hospital. The IRS allows coverage like this.
They also allow coverage for accidents (think auto-insurance), disability, dental, vision, and even long-term care. That’s because those coverages fall outside of the general medical insurance category.
Not Allowed to be on Medicare
There is not much to explain here. According to the IRS, once you enroll in Medicare you can no longer contribute to a health savings account. We can still keep our health savings account and use it to pay qualified medical expenses, but we cannot make any more contributions to it starting the month we are covered by Medicare. We will cover how this might limit our contributions during the year we turn 65 in another post.
This is something worth keeping an eye on as you approach the age of 65. If you sign up timely (there are penalties for waiting), Medicare coverage starts the first day of the month in which you turn 65. I will turn 65 on October 31st, so I will get coverage for the whole month of October.
If you are lucky enough to have a birthday on the first of the month, you get coverage for the entire month prior.
Additionally, if you happen to access Medicare due to a disability, you will lose the ability to contribute to a health savings account.
Just to be clear here, there are stiff penalties for not signing up for Medicare on time. I am talking more than a wrist slap. So I am in no way promoting delaying coverage to remain eligible for health savings account contributions. That would be a losing strategy.
Cannot be Claimed as a Dependent on Someone Else’s Tax Return
Finally, someone else cannot claim us as a dependent on their tax return. It seems unlikely this comes up much, but I am sure they have this rule for a reason.
I suppose a student working their way through school could fall into this scenario.
If that student happened to be eligible for health insurance through their employer and that employer offered an HDHP with a health saving account option, they might run into trouble with this eligibility requirement if they happened to still be considered a dependent on their parent’s tax return.
The main thing we need to worry about is making sure our employer offers a high deductible health plan with a health savings account option. This is our first priority. But there are a few other things we need to stay up on to make sure we don’t accidentally become ineligible for contributions. Looming Medicare coverage is probably the most important thing to watch out for.
If we can check these four boxes, we should be eligible for the health savings account. And now that we know we are eligible, we are almost ready to make contributions.
I am not a tax professional and this is not a recommendation to open a health savings account or enroll in a high-deductible health plan.