State healthcare law changes are creating HSA ineligibility

Copay accumulator adjustment programs

Prescription drug manufacturers commonly offer various forms of financial assistance to help cover the cost of certain specialty and/or expensive non-generic drugs, including through coupons, discounts and vouchers. In order to prevent this assistance from counting toward a participant’s deductible and annual maximum out-of-pocket cost obligations, many health plans have implemented “copay accumulator adjustment” programs. These programs aim to steer participants toward lower-cost drug options (e.g., generics) that don’t take advantage of this assistance.

Over the past few years, states looking to help health plan participants with the ever increasing cost of care overall have begun to pass laws that forbid health plans from implementing or enforcing copay accumulator adjustment programs. These new state laws mandate that health plans include any amount paid by a participant, or on behalf of a participant by another party, when calculating the participant’s total contribution to an out-of-pocket maximum, deductible, copayment, coinsurance or other cost-sharing requirement—including drug manufacturer cost assistance.

Conflict with federal HSA rules

These state mandates have a major impact on individuals’ eligibility for HSAs. Internal Revenue Code Section 223 requires that an individual must be enrolled in a qualifying high deductible health plan (HDHP) to contribute to an HSA, and cannot otherwise have disqualifying health coverage.

One of the key requirements of a qualifying HDHP is that a minimum deductible (as set by law each year) must be met before benefits under the health plan can begin. The only allowed exception to this requirement is preventive care benefits, which can be provided by the health plan before the deductible is met (e.g., annual physicals, immunizations, certain screenings, etc.). Preventive care generally does not include any service or benefit intended to treat an existing illness, injury, or condition.

A health plan that counts financial assistance toward the deductible—unless it’s related to preventive care only—is considered to be operating outside qualifying HDHP requirements. IRS Information Letter (2021-0014)* was published in response to a question about the state of Illinois’ copay accumulator adjustment program law change. In this letter, the IRS reiterates that only actual medical expenses incurred by the covered individual can count toward the qualifying HDHP minimum deductible.

For example, if a manufacturer’s coupon reduces a drug’s cost from $1,000 to $600, the amount that may be credited toward satisfying the qualifying HDHP deductible is $600 (the amount actually incurred by the covered individual), not $1,000. State laws requiring a health plan to count amounts not actually incurred by the covered individual for non-preventive care before the minimum annual deductible is met do not comply with the IRS’ ruling and make the individual ineligible for an HSA. Even if the health plan participant never takes advantage of the financial assistance, the mere fact that the health plan would count such assistance toward the deductible means the participant can’t contribute to an HSA.

It is worth noting that there is no issue created with HSA eligibility where health plan design applies the value of financial assistance to a participant’s cost sharing or deductible, once the individual meets the minimum deductible under the qualifying HDHP.

State law changes that impact HSA eligibility are not unprecedented. In recent years, Illinois, Oregon, Maryland and Vermont all passed laws requiring health plans they regulate to cover male sterilization and/or male contraceptives at no cost to all health plan participants (such coverage is not considered preventive care). Since a qualifying HDHP can only provide preventive care before the minimum deductible is met, participants in otherwise qualifying HDHPs impacted by these mandates were disqualified from contributing to an HSA.

Fortunately, the IRS provided transitional relief in these cases (Notice 2018-12)* to help alleviate ineligible HSA contributions made before participants realized the impact of these changes. The IRS also allows states to change their laws so as not to disqualify a health plan as a qualifying HDHP.

Unfortunately, no such relief has currently been contemplated by the IRS when it comes to copay accumulator adjustment law changes.

No application to ERISA covered, self-insured health plans

There’s good news for participants that in live in states that have passed these mandates, but still want to contribute to an HSA. The laws only apply to health plans subject to state regulation. Health plans that are self-insured by the employer and covered by ERISA, among others, are exempt from state regulation.

A self-insured health plan is one where the employer itself collects premiums from enrollees and takes on the responsibility of paying medical claims of those covered by the health plan. The employer contracts for insurance services such as enrollment, claims processing, and provider networks with a third party administrator, or they can be self-administered.

According to a recent Employee Benefit Research Institute (EBRI) survey, almost 42% of all employer health plans—regardless of employer size—are self-insured and more than 75% of health plans for employers with 500 or more employees are self-insured.¹

Also note that just because one health plan offered by an employer is self-insured does not mean all health plans offered are also self-insured. Employers sometimes offer a variety of health plans, some of which may be self-insured and others that are third party insured.

Current state laws

The following states have passed laws prohibiting copay accumulator adjustment programs.

States with laws that do not provide a clear exemption for qualifying HDHPs and have not offered guidance on the conflict:

States that do not provide a clear exemption but have offered additional information:

States that provide a specific exemption:

Similar legislation is currently pending in several other states.

What to do if your company is impacted

If your company’s health plans may be impacted, we strongly recommend communicating potential HSA ineligibility with your employees and closely monitoring developments going forward.

Participants of qualifying HDHPs impacted by these state mandates (assuming the state has not specifically excluded such HSA-eligible HDHPs plans from the mandate) should immediately cease HSA contributions until otherwise notified of eligibility. Negatively impacted participants should contact their HSA custodian for complete correction guidance.

When calculating the HSA contribution limit for a particular year, only the months prior to the disqualifying law’s enactment can be counted. Excess contributions based on ineligible months will need to be timely removed by the due date of the participant’s income tax return for the year these contributions were made. Related earnings must also be removed and will be subject to income tax in the year of removal. Failure to correct these contributions in a timely manner will subject the participant to a 6% annual penalty on the excess contribution amount, until corrected. No deduction will be allowed for such contributions and those contributions made on a pre-tax basis through payroll deduction will be taxable.