The Internal Revenue Service (IRS) has announced that high-deductible health plans (HDHPs) can pay for 2019 Novel Coronavirus (COVID-19)-related testing and treatment, without jeopardizing their status. This also means that an individual with an HDHP that covers these costs may continue to contribute to a health savings account (HSA).
The notice is in response to growing concerns about the virus and the associated expenses. According to the World Health Organization (WHO), “This new virus and disease were unknown before the outbreak began in Wuhan, China, in December 2019.” As of March 11, 2020, the WHO had confirmed 118,162 cases in 113 countries. According to the Center for Disease Control (CDC), the United States has reported 647 cases in 36 jurisdictions as of March 10, 2020.
Testing and treatment are clearly deductible as medical expenses. However, as fewer people claim the medical expenses deduction and instead rely on tax-favored alternatives, questions were raised about how those expenses would affect HDHPs and HSAs.
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.
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.
And when you take them out? Distributions for qualified medical expenses, including dental and vision expenses, are not taxable for federal income tax purposes.
For federal income tax purposes, medical expenses that qualify as deductible include as a treatment for a diagnosed disease or condition and must be ordered by your doctor. Medical expenses include visits for routine medical, dental, and vision care, as well as specialist care, and also include treatments, including medications and follow-up visits. Medical expenses may also include associated out-of-pocket costs, like mileage. Medical expenses that would qualify for the medical and dental expenses deduction are typically the same as those which are eligible for HSA purposes. If you combine your HDHP with an HSA, you can pay those qualifying medical expenses using funds in your HSA.
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 costs) before your HDHP benefits kick in. However, you can use your HSA to help with those costs.
However, in Notice 2020-15 (downloads as a PDF), the IRS confirmed that an individual can use an HDHP which provides testing for the coronavirus/COVID-19 before they meet their deductible without jeopardizing eligibility. In other words, health plans that otherwise qualify as HDHPs will not lose that status merely because they cover the cost of testing for or treatment of coronavirus/COVID-19 before deductibles have been met.
Also, as in the past, any vaccination costs continue to count as preventive care and can be paid for by an HDHP.
The list of qualifying expenses is updated as the popularity of HSAs and HDHPs expands. Last year, the Internal Revenue Service (IRS) added 14 items and services for a range of chronic conditions to the list of preventive care benefits that may be covered.
