Guest Article

(From the February 26, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Outlines Extensive Additional Coverage Allowable Under High Deductible Health Plans

Designers of high deductible health plans (HDHPs) that permit the establishment of health savings accounts (HSAs) under IRC § 223 are well aware that these plans need not be "bare bones" plans in the least. Section 223 specifically permits numerous types of insurance and benefits in addition to the HDHPs. PLR 200704010, released January 26, 2007, provides extensive guidance on how broad coverage can be and still be deemed a "high deductible health plan." The ruling examines 11 policies, all but one of which also offers multiple riders. Nearly all of these qualify as allowable plans under the ruling, although a few of the riders are disqualified.

Under IRC § 223 HSAs are available only to individuals and families who are covered by "high deductible health plans" and no other coverage except "permitted insurance" and "permitted coverage." These two exceptions allow HDHPs holders, in fact, to have extremely generous coverage, so long as those coverages remain within the definition of "permitted insurance" or "permitted coverage." "Permitted insurance" is defined as insurance for a specified disease or illness or that pays a fixed amount per day (or other period) of hospitalization. "Permitted coverage" includes coverage for accidents, disability, dental care, vision care or long-term care (whether through insurance or otherwise). Section 223(c)(2)(C) provides a safe harbor for preventive care and IRS guidance has stated that preventive care includes screening services for cancer and heart and vascular diseases.

Most Pass, but Heed the Warning

Of the 11 examples of policies, only one failed to qualify, but several of the riders to various policies failed to qualify. The PLR warns:

The following describes the various policy and riders.

Policy A -- Covering Cancers, Excluding Skin Cancer

Policy A is a group policy that covers the first occurrence of skin cancer up to a specified amount, but does not cover conditions or illnesses resulting from the cancer or any other diseases. As such, Policy A is "specified disease or illness" coverage which is permitted insurance under IRC § 223. The following individual riders to the cancer policy are also permitted:

Policy B -- Pays Specified Amount on First Occurrence of Cancer

This group policy pays a specified amount and covers various treatments up to a specified amount and three optional riders similar to those in Policy A. This is a permitted policy.

Policy C -- Individual Policy for Specified Diseases

This permitted policy covers treatment up to a specified amount for cancer and other specified diseases. Rider options include (1) specified amount to be paid at diagnosis, (2) per diem for each day of confinement, (3) per diem up to 45 days, reductions at age 70, exclusions of diseases diagnosed during 30 day waiting period, (4) specified amounts for treatment, (5) specified amount paid at cancer diagnosis, with payments increasing based on length of time.

Policy D -- Specified Disease

Policy D is a group policy covering specified diseases and a benefit for preventive care. Each of these is permissible coverage, hence the Policy D is a permitted policy.

Policy E -- Heart Disease, Stroke

A group policy paying a specified amount for the treatment of heart attack, heart disease, and strokes and providing riders for (1) specified payments at the diagnosis of cancer, and (2) per diems for intensive care and ambulance transportation is permissible.

Policy F -- Specific Disease and Amount

A policy paying a specific amount for a specific disease named in the policy and offering riders covering specific amounts for cancer and intensive care per diems is permissible.

Policy G -- Fixed Per Diem for Hospitalization

A group hospital policy paying a specified amount for each day of hospital confinement up to a specified number of days, a specified amount for each day of confinement in an intensive care unit, and a premium waiver during such period of hospital confinement is permissible coverage. The policy also has several riders that meet the definition of permissible coverage and several that do not. Consequently, any individual covered by one of the riders that is not permissible will not be eligible to fund an HSA.

Policy H -- Per Diem and Physician Visits for Any Reason

Policy H is a group plan that pays a flat amount for a specific number of days, but it also includes many other benefits, including up to five visits a year for any reason for a physician's treatment outside of a hospital and offers numerous riders. While the IRS does not specifically identify the precise benefits that disqualify the plan as a HDHP, one disqualifier would be these office visits. Because the underlying policy is invalid, the riders also would be invalid.

Policy I -- Off the Job Accident Resulting in Death or Dismemberment

Policy I is an individual policy paying a set amount for losses from an off-the-job accident that results in death or dismemberment. The policy pays a specified amount for medical expenses resulting from the accident. The policy offers a number of riders, including (1) a specified amount per month for total disability resulting from sickness, (2) a specified per diem for hospital confinement due to sickness regardless of disability, (3) a specified amount for treatment by a physician outside of a hospital for any reason and regardless of whether the covered individual is disabled as defined in Policy I. While Policy I and riders 1 and 2 would be permissible, rider 3 is not permissible because providing reimbursement for a physician's treatment for any reason is not a benefit that can be offered by HDHPs without limit. It does not fall under the allowable exceptions for preventive care, permitted insurance or permitted coverage.

Policy J -- Accidental Death or Dismemberment

Policy J is an individual policy that pays a specified amount for covered losses sustained from an on-the-job or off-the-job accident resulting in accidental death or dismemberment within 90 days from the date of the accident. Policy J also pays a specified amount for hospital confinement, ambulance transportation, medical expenses and payment for total disability resulting from the accident. Policy J does not cover loss caused by sickness. The policy offers a number of riders, including (1) payments at a specified amount per month for total disability resulting from sickness, (2) a specified amount for each day of hospital confinement due to sickness that does not result from an injury, regardless of whether the covered person is disabled, (3) payment of a specified amount for treatment by a physician outside of a hospital for any reason and regardless of whether the covered individual is disabled as defined in Policy J. Policy J and riders 1 and 2 are permissible. But rider 3 fails because it does not fit within the definition of permitted coverage, permitted insurance, or preventive care.

Policy K -- Accidents Off-the-Job

Policy K is an individual policy that pays a specified amount for covered losses sustained from an off-the-job accident resulting in accidental death or dismemberment within 90 days from the date of the accident and for hospitalization and other expenses resulting from the accident. The policy does not cover sickness. Policy K is "permitted accident coverage," as allowed by IRC § 223.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879-5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.