United States

New IRS guidance increases high deductible health plan flexibility

Treatment for chronic health conditions can be preventive care

TAX ALERT  | 

On July 17, 2019, the IRS published Notice 2019-45 which expands the types of medical expenses that can be paid under a high deductible health plan (HDHP) without violating the minimum deductible requirement. This IRS guidance is in response to an executive order issued by President Trump in June.

Background

As health care costs continue to increase, more companies are offering high deductible health plans which can be paired with health savings accounts (HSAs). An HDHP is a health plan that meets certain limits on annual deductibles and out-of-pocket expenses. An HSA is a financial account, held by an individual rather than an employer, which has special tax advantages, especially when the funds are used to pay medical expenses. Individuals enrolled in HDHPs are encouraged to establish and contribute to HSAs in order to set aside tax-free money for paying medical costs, such as deductibles and copays.

The annual limits on HDHPs vary based on if the health coverage is self-only coverage (covering just one individual) or family coverage (covering two or more individuals). The limits are adjusted for inflation each year and the current limits are as follows:

 

2019 Annual Limits

 

Self-Only Coverage

Family Coverage

Minimum annual deductible

$1,350

$2,700

Maximum out-of-pocket expenses

$6,750

$13,500


The minimum annual deductible is the amount that an individual must pay for medical expenses before the health plan will pay any medical costs. For example, if a health plan has a $3,000 minimum annual deductible, individuals enrolled in the plan would need to pay the first $3,000 of medical costs they incur during the year before the health plan would pay any of their remaining costs. This can impose a financial burden on individuals.

Preventive care

An HDHP can be designed to allow certain preventive care expenses to be paid by the health plan even though the annual deductible is not yet met, including:

  • Periodic health evaluations (such as annual physicals), including tests and diagnostic procedures ordered in connection with these routine exams
  • Routine prenatal and well-child care
  • Immunizations for children and adults
  • Tobacco cessation programs
  • Obesity weight-loss programs
  • Screening services, such as for cancer or heart disease
  • Drugs and medications, if certain requirements are met

However, preventive care generally does not include any service or benefit intended to treat an existing illness, injury or condition. Consequently, individuals with chronic health conditions typically must pay out-of-pocket for the medical costs they incur until their health plan deductible is met. Due to the cost of care, some individuals do not seek out or utilize effective and necessary care that would prevent exacerbation of their chronic condition.

The federal government has recognized that failing to address chronic conditions due to cost concerns can lead to complications which require more extensive medical intervention. Therefore, the government is expanding the list of items which can be considered preventive care under an HDHP.

The new IRS notice contains an appendix which lists certain medical services and items which an HDHP can include in its definition of preventive care. The list includes treatments for chronic conditions such as health disease, hypertension, asthma, diabetes, liver disease, bleeding disorders, depression and osteoporosis. The IRS states that medical services and items which are not on the list cannot be considered preventive care by an HDHP; however, the IRS intends to review and update the list periodically in the future. The IRS notice is effective July 17, 2019.  

While these treatments are now available to be included as preventive care, an employer’s current HDHP is probably not designed to include these treatments. Also, employers will need to decide whether to expand the HDHP coverage to include some or all of the treatments in the next benefits year, and whether to increase the cost of health coverage based on the added treatments.

Via this notice, the federal government is taking steps to allow more medical expenses to be paid by an HDHP as preventive care before the annual deductible is met, thus expanding the use and flexibility of HDHPs and HSAs. For more information about HSAs, see Health savings accounts: A tax-free way to pay for medical expenses.

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