On March 30, 2004, IRS issued further guidance on Health Savings Accounts (HSAs) and the new Code Section 223 in the form of Notice 2004-3, Notice 2004-25, Revenue Ruling 2004-38, and Revenue Procedure 2004-22. More guidance is expected to be released in the future.

The press release announcing this issuance stated that it was in response the industry's request for "more guidance on what is allowable as preventive care under a high deductible health plan and for clarification of the allowable interaction between the HDHP and prescription drug benefits". (If you like, you can view the press conference.)

In brief, this is a description of the guidance issued:

Notice 2004-3. Safe Harbor Preventive Care Definition

Previous guidance stated that the high deductible health plan (HDHP) could not provide benefits for any services or treatments below the statutory minimum deductible with the exception of preventive care. However, preventive care was not clearly defined. This notice indicates that preventive care includes, but is not limited to, the following:

• Periodic health evaluation and associated tests and diagnostic procedures (such as annual physicals)
• Routine prenatal and well-child care
• Immunizations for both adults and children
• Tobacco cessation programs
• Obesity weight loss programs
• Screening devices (as listed in the Notice's Appendix)

Excluded are services or treatments intended to treat an existing condition.

It was also clarified that preventive care will be defined by this Notice, and not by state law. That is, even if the state laws characterizes a certain benefit as "preventive care", this characterization does not, in and of itself, mean that the benefit is qualified as preventive care under an HSA.

However, what is not clarified is whether specific drug treatments can constitute preventive care. The Treasury requested further comment on how benefits provided by employee assistance plans (EAPs) or other mental health programs may qualify as preventive care.

Revenue Ruling 2004-38. Interaction of HDHP and Prescription Drug Benefits

Treasury indicates through this Revenue Ruling that an individual who has both HDHP coverage that does not cover prescription drug benefits and a separate plan or rider covering prescription drug benefits below the statutory minimum amount is not an eligible individual. Notice, however, that Treasury provides transitional relief through Revenue Procedure 2004-22 (see below). (If the separate plan or rider does not provide benefits until the minimum annual deductible has been satisfied, the individual can still be qualified as eligible.)

While the hypothetical facts in this Ruling relate to a prescription carve-out plane, apparently the rationale could apply to any other non-high deductible coverage that provides coverage for benefits other than "permitted coverage or insurance" (for instance, a Health FSA covering OTC drugs).

Revenue Procedure 2004-22

Through this Procedure, the application of Revenue Ruling 2004-38 (above) is partially suspended until January 1, 2006, for those individuals covered by both a HDHP and a separate plan or rider that provides prescription drug benefits below the minimum annual deductible. This relief applies to both existing plans and newly adopted plans. (This transition appears to apply only to prescription drug carve-outs, while the Revenue Ruling 2004-38 applies to any non-high deductible plan providing other than permitted insurance or coverage.)

Notice 2004-25

This notice provides transition relief for individuals who are otherwise eligible individual, but cannot find a trustee either capable or willing to establish an HSA for the individual. Under this Notice, expenses incurred after January 1, 2004 can be reimbursed by an HSA if the individual was otherwise an eligible individual when the expense was incurred and the HSA is established by April 15, 2005.

Here are links you may find useful.

Notice 2004-2 issued 12/22/2003

Treasury web site for Health Savings Accounts

Treasury HSA FAQs

Internal Revenue Bulletin 2003-40 listing Nonbank Trustees and Custodians

HSA Basics PDF copy of slides created by Treasury explaining the basic

In This Issue

IRS Updates HSA Regulations
DataPath's Solutions for HSAs
DataPath's 2004 Annual Conference
DataPath's Growing!!!
What is Automatic Adjudication?
OTC Medicine Gain Eligibility under FSAs