Employee and dependent HSA eligibility rules

Information on this page can answer two questions:
Can your employee have an HSA?
What dependents are eligible for HSA money?

Can your employee have an HSA?

Use these guidelines to determine when and how your employees can establish and/or contribute to a health savings account (HSA).

First the account holder must meet four requirements:

1. Must be covered under a qualified high deductible health plan (HDHP)
2. Not covered by any other non-HDHP (this includes a health flexible spending arrangement (FSA), unless it's a limited purpose FSA)
3. Not enrolled in any part of Medicare (A, B, or D)
4. Not claimed as a dependent on anyone else's tax return

These requirements only apply to the HSA account holder. Once an eligible employee has set up an account, they can use the HSA funds to pay for eligible expenses for themselves or their family, even if their dependents have different health coverage (that may not be a HDHP).

Employees with Medicare eligibility

An employee who is eligible for Medicare, but isn't enrolled in a Medicare plan may establish and contribute to an HSA. Employees who are enrolled in Medicare (Part A, B or D) are not eligible to participate in an HSA, but they can still enroll in the HDHP as dual coverage with a Medicare plan.

If the member is dual-covered by Medicare and the HDHP, then Medicare Secondary Payer rules apply when determining how the HDHP and Medicare will coordinate. Read about the Centers for Medicare & Medicaid Services' Medicare Secondary Payer rules (820KB PDF).

Plans with mid-month effective dates

According to the IRS, if your group switches to a Priority Health HDHP in the middle of a month, your employees will not be able to open HSA bank accounts until the first of the following month. If they seek any medical services during that time, they will not be able to use HSA funds to pay for that service.

For example:

• If an employee's HDHP eligibility begins on Aug. 15, they cannot establish an HSA until Sept. 1.
• If the employee has a claim between Aug. 15 and Aug. 31, they won't be able to use HSA dollars to pay for health care services received during that time. They will be fully responsible for all deductibles or copays.

Transitioning to an HSA from an existing FSA

According to the IRS, members who have an HSA plan can't be covered by a health FSA (see requirement #2 above). If your group currently offers a health FSA and you'd like to switch to an HSA-qualified plan in the middle of an FSA plan year, then you can choose one of three options:

1. Terminate the health FSA for all participants (even for those who choose not to participate in the HSA-qualified plan). Be sure to follow ERISA because the IRS generally discourages terminating FSAs mid-year.
   • All unused funds will be forfeited.
   • Groups choosing this option should consult with their legal counsel regarding the ramifications for terminating a plan early.
2. Convert the health FSA into a limited FSA for all participants (even for those who choose not to participate in the HSA-qualified plan).
   • Participants will not be allowed to change their existing salary reduction elections because this change is not considered a qualifying event. This means that employees may lose money if they don't have enough allowable expenses to use up their FSA funds for the year.
3. Only offer the HDHP/HSA to employees not participating in the health FSA
   • May not be ideal if a large number of employees participate in the health FSA
   • May not be an option for small employer groups only offering one plan design
   • Employer groups must still comply with Priority Health's underwriting guidelines
   If none of these options work, you may decide to wait until your current FSA plan year is over and renew the medical plan early with the HDHP/HSA. At that time, you would need to implement a limited purpose FSA or stop the FSA entirely. By choosing the early renewal option, you will experience an early renewal rate change, and your renewal date will always be the new date from this point on. And if your current heath FSA includes a grace period (extra time after the plan year ends to submit FSA claims), participants must have a zero FSA balance at the end of the plan year to maintain HSA eligibility.

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   What dependents are eligible for HSA money?

   The IRS definition of a dependent is used when determining a dependent for HSA purposes. The account holder must be able to "claim" the child/relative as a dependent on their tax return. If the account holder can't claim the child/relative as a dependent, then they can't spend HSA dollars on services provided to that child/relative.

   Here is the IRS definition of a dependent:

   Qualifying child

   • Daughter, son, stepchild, sibling or stepsibling (or any descendant of these)
   • Has same principal place of abode for more than one-half of taxable year
   • And not yet age 19 (not yet age 24 if student)
   • Or permanently and totally disabled

   Qualifying relative

   Someone who:
   • Bears a relationship: daughter, son, stepchild, sibling or stepsibling (or any descendant of these), father, mother or ancestor, aunt, uncle, in-laws or an individual who has his/her principal place of residence the home of account owner
   • Receives more than half of support from account owner