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Health savings account enrollment problems
by Tony Novak, CPA, MBA, MT
, revised 11/21/2011
Enrollments in the new Health Savings Accounts began in the middle of December 2003 for the first plans effective January 2004. Individuals, business owners, and tax advisers were left with many unresolved issues after the end of the first few weeks of enrollments. The following observations were gathered from the first 300 (+/-) applicants during the period of December 12-29, 2003 using OnlineAdviser services. The bulk of problems that were not resolved to the applicant’s satisfaction focused on two issues: 1) what is “Qualifying High Deductible Insurance”, and 2) who can be a trustee. Our consistent advice to applicants is to “get it in writing” now to avoid tax problems later.
Vague and missing IRS guidance on “qualifying high deductible insurance”
The IRS issued written guidance to taxpayers in late December 2003 designed to confirm that Health Savings Accounts follow rules similar to IRAs and MSAs. The IRS has not yet issued guidance to health insurance companies to detail the qualification procedures for “Qualifying High Deductible Insurance”. The result is that taxpayers are left with the impression that any high deductible insurance that meets the consumer requirements of Section 223 of the tax code is also a “Qualifying High Deductible Insurance”. This same communication issue was also a problem with the former Medical Savings Account law. This gap caused many taxpayers to open MSA accounts only to be notified later by the IRS that they did not qualify for the tax deduction. Apparently the same pattern is being copied with Health Savings Accounts. Some taxpayers have opened Health Savings Accounts under the incorrect assumption that they will be entitled to the tax deduction.
Insurance company flip-flops
Some health insurance companies that originally stated their intention to offer ”Qualifying High Deductible Insurance” have now revered their position and are carefully informing policyholders that their current plans do not currently meet the legal requirements. This is probably because they do not yet know what the legal requirements are yet, rather than a reverse of business strategy regarding Health Savings Accounts. We still believe that eventually the number of qualifying health insurance plans will increase but this may take many months or years.
At this time there are only a few “Qualifying High Deductible Insurance” plans and only a handful of states have these plans available under an “open enrollment” arrangement for individuals with a significant medical history.
Contradicting verbal communications
Applicants sometimes found that one employee of a health insurance company affirmed that the health insurance would be a “Qualifying High Deductible Insurance” while another employee of the same health insurance company denied that their health insurance plans would meet the requirements. A lack of clear written communications about “Qualifying High Deductible Insurance” is a problem throughout the insurance industry at this early stage of Health Savings Accounts. The solution is obvious; get it in writing from the insurance company.
Account trustees
The rules for trustees handling Health Savings Account are straightforward and exactly the same as for Medical Savings Accounts and very similar to those for Individual Retirement Accounts. Yet because Health Savings Accounts are brand new, applicants have raised a number of questions.
Self-administered plans
Some individuals have proposed serving as their own trustee. This clearly will not work. The law was designed to require a financially qualified disinterested third party handle the accounts. Health Savings Accounts may be self-directed but not self-administered.
Choice of trustee
Other applicants want to use their current bank or investment company as trustee but a large majority of financial firms do not offer administrative services for Health Savings Accounts. There are three reasons for the apparent lack of interest among financial companies: 1) the Health Savings Account market is too small at this time to be profitable for most firms, 2) there is a belief that most Health Savings Accounts will have small account balances, 3) the banks that specialize in Health Savings Accounts offer the service so inexpensively (some are free) that other firms find it difficult to compete. For the next few years at least, most Health Savings Accounts are likely to be held by a small handful of banks that specialize in providing this service.
No verification of eligibility required
The IRS does not require trustees to verify an applicant’s eligibility for a Health Savings Account before opening an account. This is good news for the trustee but bad for taxpayers. Anyone can open an account, pay the administrative fees and then be informed later by the IRS that they are not eligible for the deduction. The result is a notice from the IRS that additional taxes and interest are due on the Health Savings Account deposits. The applicant has no recourse against the account trustee.
In summary, applicants who stick to mainstream providers of Health Savings Accounts will have no problems. Both the health insurance company and the trustee should deliver clear written verification that the plan is compliant with current law. Those who try to interpret the new law in favor of their own situation are likely to be caught in an IRS compliance “matching” audit. Current Health Savings Account law may be discriminatory and, in fact, not what the original lawmakers intended, but nevertheless is the framework under which the new Health Savings Accounts will operate in 2004.
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