Legislation was passed in Kansas last week allowing health savings accounts to be utilized in that state. Apparently, according to this article, the problem was this: State law mandated that mental and nervous conditions be covered for 100 percent of the first $100 of expenses, 80 percent of the next $100, and 50 percent of the next $1,640. Thus, if an insurance carrier had to provide this first dollar coverage, the plan no longer would meet the federal definition of a “High Deductible Health Plan” (“HDHP”), meaning that health savings accounts could not be utilized in that state. The old Medical Savings Accounts were available in Kansas because the state exempted them from this requirement. The Kansas legislature was quick to remedy the problem by enacting legislation. Good for them.
Other states with similar issues should follow suit, enacting legislation to make HSAs viable in their states. Please note the following language in IRS Notice 2004-23 pertaining to mandated state law requirements:
Section 220(c)(2)(B)(ii) allows a high deductible health plan for purposes of an Archer Medical Savings Account to provide preventive care for this purpose. Section 223(c)(2)(C), for purposes of an HSA, does not condition the exception for preventive care on State law requirements. State insurance laws often require health plans to provide certain health care without regard to a deductible or on terms no less favorable than other care provided by the health plan. The determination of whether health care that is required by State law to be provided by an HDHP without regard to a deductible is “preventive” for purposes of the exception for preventive care under section 223(c)(2)(C) will be based on the standards set forth in this notice and other guidance issued by the IRS, rather than on how that care is characterized by State law.
In other words, the IRS has stated it will not automatically consider state law mandated coverage to be “preventive” under the HSA requirements. As a result, plans that would otherwise be HDHPs could fail to qualify if they provide a state-mandated benefit that must be paid before the high deductible applies, unless that mandated benefit qualifies as “preventive” under the IRS safe harbor definition. The IRS has a whole laundry list of what constitutes “preventive” care in IRS Notice 2004-23 (in the Appendix). They have also asked for comments regarding other items which should be added to the list, indicating that the list may grow in the future.