If you’ve grown tired of digging into your wallet to pay for out-of-pocket medical expenses, you might be getting a break. The Internal Revenue Service (IRS) has added treatments for a range of chronic conditions to the list of preventive care benefits that may be provided by a high-deductible health plan (HDHP) in tandem with a health savings account (HSA).
The list of 14 items or services can be found here:
You can also find the list in the latest guidance posted by IRS as Notice 2019-45 (downloads as a PDF).
Under section 223 of the Tax Code, eligible individuals can contribute to HSAs. Typically, to qualify, you must be covered under an HDHP and have no disqualifying health coverage.
Here’s how it works. You can make pre-tax contributions to your HSA out of your paycheck. Your employer may also opt to kick in funds. Employer contributions are not considered income for tax purposes, so not only is it free money, it’s tax-free. No matter who makes the contributions, funds in an HSA will grow federal income tax-free. (For more on HSAs, click here.)
There are restrictions. Under the rules, an HDHP may not provide benefits for any year until the minimum deductible for that year is satisfied. In other words, you have to meet your deductible (out of pocket) before benefits kick in. There are some exceptions to the rule, but the limits can pose a real problem for folks who need to pay for the cost of treating certain chronic conditions, like diabetes, under those plans. The IRS has now confirmed that an individual can use an HDHP which provides preventive care benefits before they meet their deductible without jeopardizing their HSA eligibility.
The rules on what might qualify as preventive care under an HDHP/HSA arrangement have been fuzzy for some time. Earlier this year, President Trump issued an Executive Order directing Treasury to issue guidance on HDHPs that can be used with an HSA, including the use of preventive care costs to treat chronic conditions. The resulting guidance was Notice 2019-45.
What qualifies as a preventive care benefit is key. In prior years, Treasury and IRS took the position that preventive care did not include any service or benefit intended to treat an existing illness, injury, or condition. However, the costs associated with treating some of those conditions were prohibitive – and not paying for treatment made the conditions worse. As explained in the Notice, “Failure to address these chronic conditions has been demonstrated to lead to consequences, such as amputation, blindness, heart attacks, and strokes that require considerably more extensive medical intervention.”
The IRS has now confirmed that certain medical care, including the cost of prescription drugs, for specific chronic conditions are considered preventive care for purposes of HDHP and HSA benefits. These medical services and items are limited to the particular medical care services or items listed in the chart above (and found in the Notice).
There’s an additional caveat: If an individual is diagnosed with more than one chronic condition, all listed services and items applicable to the two or more conditions are considered to be preventive care. However, services and items that are not listed and are used to treat secondary conditions or complications that occur even with the preventive care are not treated as preventive care for purposes of HDHP and HSA benefits.
It’s generally good news for those who have been forced to pay out of pocket for services and items on the list before meeting their deductible. However, it’s worth noting that the guidance is just that: guidance. It doesn’t require an HDHP to pay the complete cost for preventive care items on the list, so you’ll want to check your plan for details. The hope is, of course, that the expansion of services will encourage those with chronic conditions to seek and follow-up on appropriate medical treatment.
The notice is effective as of July 17, 2019.
