By Stephen Miller
The Internal Revenue Service (IRS) announced limits for 2016 on contributions to health savings accounts (HSAs) and for out-of-pocket spending under high-deductible health plans (HDHPs) linked to them.
In Revenue Procedure 2015-30, issued May 5, 2015, the IRS provided the inflation-adjusted HSA contribution and HDHP minimum deductible and out-of-pocket limits, effective for calendar year 2016. The higher rates reflect a cost-of-living adjustment and rounding rules under Internal Revenue Code Section 223.
The lack of increases for individual contributions and modest increases for family contributions reflect the government’s calculation of a continuing tepid inflation rate.
Penalties for Nonqualified Expenses
Those under age 65 (unless totally and permanently disabled) who use HSA funds for nonqualified medical expenses face a penalty of 20 percent of the funds used for such expenses. Funds spent for nonqualified purposes are also subject to income tax.
While the Affordable Care Act allows parents to add their adult children (up to age 26) to their health plans, the IRS definition of a qualified dependent (child or relative) who may be covered under an employee’s HSA is different. This means, for instance, that an employee whose 24-year-old child is covered on his HSA-qualified high-deductible health plan may not be eligible to use HSA funds to pay that child’s medical bills (unless the child is a full-time student, and therefore a qualified dependent for tax purposes).
Affordable Care Act Limits Differ
Starting in 2015, out-of-pocket limits for HDHPs under the Affordable Care Act (ACA) were slightly higher than the IRS’s limits on HSA-qualified HDHPs. But the IRS limits are what determine if an HDHP is HSA-compliant for tax purposes.
The Department of Health and Human Services published its 2016 ACA out-of-pocket limits for HDHPs in the Federal Register at the end of February 2015, in its Notice of Benefit and Payment Parameters for 2016.
“The ACA limits are based on the out-of-pocket limits for high-deductible health plans (although the method of indexing the limits for inflation is different, with the result that the dollar amounts don’t match),” according to an analysis by Covington, an employment law firm. Moreover, the ACA limits “apply to all nongrandfathered group health plans, including (but not limited to) HDHPs.”
A May 7, 2015, FYI alert from Buck Consultants noted that, regarding the ACA-specific limits, “under recent guidance from the Department of Health and Human Services, a plan must apply the annual limitation on cost sharing for self-only coverage to OOP [out-of-pocket] maximums for each individual in a family plan—even if this amount is below the family OOP maximum.”
However, “Employers offering HSA/HDHP plans will need to ensure they satisfy the lower IRS out-of-pocket maximums for HDHPs,” not the higher ACA limits, Buck Consutlants advised. “Plan sponsors should review current and proposed HSA/HDHP arrangements, and update plan documents and enrollment materials as needed to reflect the new limits.”