Maryland Law Jeopardizes Health Savings Accounts - Legislative Fix Appears to be Near
A Maryland law enacted in 2016, the Contraceptive Equity Act (Act), prohibits health insurance plans from applying a deductible to male sterilization. The Act, which became effective on January 1, 2018, has jeopardized the tax-advantaged status of health savings accounts (HSAs), impacting all Maryland employers sponsoring (and individuals participating in) high-deductible health plans (HDHPs) with HSAs.
HSAs are tax-advantaged savings vehicles used in connection with HDHPs that allow individuals to save money for defraying out-of-pocket medical expenses. Subject to certain annual limits, employers can make tax-deductible contributions to employees’ HSAs, and employees can make pretax contributions to their HSAs. HDHPs are required under the Internal Revenue Code to have minimum annual deductibles (e.g., $1,350 for individual coverage in 2018). To be eligible for an HSA, an individual generally cannot have coverage other than an HDHP. If an HDHP violates the minimum annual deductible requirement, it would fail to be an HDHP, and eligibility would be lost for its related HSA. An exception to the minimum deductible requirement allows HDHPs to cover “preventive care” with no deductible. The IRS has issued a safe harbor definition of preventive care. However, this definition does not include male sterilization. Therefore, the Maryland Act could cause HDHPs to violate the minimum deductible requirement, which would cause their related HSAs to lose tax-advantaged status – that is, employers would lose deductions for contributions to HSAs, and employees would be unable to make pretax contributions.
The Maryland Senate passed SB 137 on February 27, 2018 by a vote of 46-0, which amends the Act to exempt HDHPs from the prohibition on applying deductibles to male sterilization. The Maryland Bankers Association was part of a coalition providing testimony before the Senate Finance Committee in support of SB 137. The companion House Bill (HB 135) has not been voted on yet but received a favorable report on March 6, 2018. If the HDHP exemption is signed into law, additional guidance from the IRS would be welcome regarding HSA contributions made after January 1, 2018 but before the exemption’s enactment.