A new law passed in Maryland may endanger the future of HSA plans in the state. A Health Savings Account (HSA) provides significant tax benefits for saving toward healthcare expenses. Contributions can be deducted or excluded from taxable income and any earnings on the account are also tax free. The money in the account must be used for qualified medical expenses. One of the main requirements for an individual to qualify to set up an HSA is that the individual must be covered under a “High Deductible Health Plan” (HDHP), as defined by the IRS, and this is where Federal and Maryland laws are presently at odds.
What is the issue?
In 2016, new legislation was enacted in Maryland requiring certain additional services to be covered without any deductible or cost-sharing. Under Federal law, , HDHPs are not allowed to cover any benefits before the deductible is met, unless the benefits fall under the IRS definition of preventive services. Based on current IRS guidance, the new covered services under Maryland do not fall under preventive services. The result of this clash is that, as of January 1, 2018, HSA-qualified HDHPs no longer exist in Maryland. Contributions made will not be deductible and could be subject to a 6% excise tax.
Since the new legislation only affects plan years beginning on or after January 1, 2018, plans whose years began earlier will be safe until the end of the plan year. For example, if an individual’s plan year began December 1, 2017 HSA contributions will be allowed until the new plan year begins on December 1, 2018.
What should I do?
Anyone with an HSA whose plan year restarted on January 1, 2018, is advised to avoid making HSA contributions at the present time. The State of Maryland has asked the IRS to add the new services to the list of approved preventive care services, and the Maryland General Assembly is expected to consider emergency legislation to fix the problem; however, it is not currently known whether either solution will succeed. Even if a remedy is provided, it may not be retroactive to January 1, 2018, meaning that contributions made in the meantime will be disallowed. As noted above, plans that did not restart on January 1, 2018, are temporarily grandfathered in, and HSA contributions will be safe until the plan year restarts. As participants in such plans approach the end of their plan year, they will need to monitor the situation to determine an appropriate course of action.
Contributions made in previous years may still be used for health expenses—it is only new contributions that are affected. If individuals have already made contributions to their HSA after January 1, 2018 they will need to pay close attention to the resolution of this issue and determine if any additional action is necessary. If you have any questions about this developing story, please contact your Hertzbach tax advisor at 410-363-3200. We will provide additional information as it becomes available.