States such as Illinois, Maryland, and Oregon that have enacted laws requiring health insurers to cover certain male contraception on a first-dollar basis may be creating traps for unwary employers that sponsor high-deductible health plans.
That is the clear message from IRS Notice 2018-12, which concludes that male contraception is not “preventive care” as that term is used in the regulations governing health savings accounts (HSAs), and therefore a plan that offers such coverage is not a high-deductible health plan (HDHP) for purposes of an individual’s eligibility to make HSA contributions.
An employee must be enrolled in an HDHP in order for his or her HSA contributions to be tax-deductible and for employer contributions to be excluded from income. In order to be an HDHP, a group health plan may not have a deductible lower than that established by the IRS and generally must not cover any health care expenses prior to the deductible, except that certain preventive care may be reimbursed without regard to the required minimum deductible.
Illinois, Maryland, and Oregon have each enacted laws that require insurers to cover male sterilization or male contraceptives without a deductible. These laws notwithstanding, in Notice 2018-12, the IRS points out that male sterilization and male contraception do not fall within the definition of preventive care which an HDHP may cover prior to the deductible. (Female contraception is considered preventive care.) Accordingly, any plan that complies with those state law mandates regarding male contraception would fail to be an HDHP and any individual covered by such a plan would not be eligible to make or receive tax-favored HSA contributions.
Recognizing that this effectively precludes many individuals in those states from taking advantage of HSAs, and that states will need time to amend their laws if they so choose, Notice 2018-12 allows for transition relief. At any time prior to 2020, an individual will not fail to be HSA-eligible solely because he or she is covered under what would otherwise be an HDHP except for the plan’s coverage of male sterilization or contraception before the IRS-required minimum deductible is met.
Separately, as a result of last year’s tax reform law, the IRS also lowered the maximum HSA contribution for family coverage from $6,900 for 2017 to $6,850 for 2018 (Rev. Proc. 2018-18). Employers should notify HSA-eligible employees of the reduced maximum contribution as soon as possible to avoid an employee making excess contributions. In the event an employee has already contributed more than the 2018 maximum, he or she may request a taxable withdrawal of the excess from the HSA custodian to avoid tax penalties.