COBRA Implications with HSAs

We get a lot of questions from our clients about HSAs.  Here's a good question posed to our friends at PrimePay and some things to remember about HSAs.

As health savings accounts (HSAs) become an increasingly popular health plan offering, I’ve been seeing more questions come up as it relates to the Consolidated Omnibus Budget Reconciliation Act (COBRA). See the question and explanation below, and other tips to remember about your HSA.

Q: My employer sponsors a High Deductible Health Plan (HDHP) and I have an HSA. My child just aged out of coverage under my HDHP. Is my child entitled to COBRA for the HDHP and the HSA?

A: HDHP: Their child would be entitled to COBRA for the employer-sponsored HDHP if the employer is subject to COBRA continuation requirements and the child lost coverage due to the child losing eligibility under the terms of the plan.

HSA: If an HSA is not an ERISA plan, and it nearly never would be, then it wouldn’t be subject to COBRA continuation requirements.

Tips to Remember

In considering the application of COBRA to HSAs, it’s important to remember that the HDHP has to be considered independently. COBRA continuation rights must be offered when one's employer-sponsored coverage under an HDHP is lost due to certain qualifying events.

Remember, there is no need for COBRA-like coverage given the vested and portable nature of HSA accounts. HSAs are tax-favored IRA-type trust accounts that “eligible individuals” can establish to pay for certain medical expenses of the eligible individuals, their spouses, or their tax dependents.

HSAs are tax-favored IRA-type trust accounts that “eligible individuals” can establish to pay for certain medical expenses of the eligible individuals, their spouses, or their tax dependents. To be eligible to contribute to an HSA, an individual must be covered under a qualifying HDHP.  The individual must not be entitled to Medicare and must not be a tax dependent.

HSA eligibility isn’t tied to employment but eligibility is tied to having HDHP coverage. So, that means that in order to contribute to an HSA after, (for example) someone’s left a company, they would have to elect continuation coverage under the HDHP or elect HSA-qualified coverage in the individual market in order to continue contributing to their HSA. They can make personal (after-tax) contributions to your HSA and deduct those contributions from their adjusted gross income when they file their personal income tax return.