Who is an eligible individual for purposes of a health savings account (HSA)?

An individual is eligible to establish an HSA if, with respect to any month, he or she:

• is covered under a high deductible health plan (HDHP) on the first day of that month;
• is not also covered by any health plan that is not an HDHP (with certain exceptions discussed below);
• is not entitled to Medicare (meaning eligible and enrolled); and
• may not be claimed as a dependent on another persons tax return.

Permitted insurance and permitted coverage. Individuals who are covered under an HDHP may also have coverage for "permitted insurance" and "permitted coverage." Permitted insurance includes coverage relating to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property, insurance for a specific disease or illness, and insurance that pays a fixed amount per day (or period) of hospitalization. Permitted coverage is coverage for accidents, disability, dental care, vision or long-term care. Also, cards for discounted medical services may be used with an HSA as long as the insured pays for the discounted services and those payments apply toward the high deductible.

Health-related programs. An individual will not lose his or her eligibility for an HSA solely because he or she is covered under an Employee Assistance Program (EAP), disease management program or wellness program if the program does not provide significant benefits in the nature of medical care or treatment. These types of programs are not considered to be health plans under Code Sec. 223(c)(1). For example, an EAP that provides free or low-cost, short-term counseling to identify employee problems that may affect job performance does not provide significant benefits in the nature of medical care or treatment.

Prescription drug programs. The IRS has ruled that an individual who is covered by both an HDHP that does not apply to prescription drugs and by a separate prescription drug plan that provides benefits before the minimum annual HDHP deductible has been satisfied does not qualify and cannot make HSA contributions.

Reprinted with permission. © CCH