Does Supplemental Coverage Disqualify You from Funding Your Health Savings Account?

By William G. Stuart | Originally posted on LinkedIn

This column is an excerpt (Question 15) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and a citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: My employer offers a voluntary supplemental insurance product that pays us $500 per day for up to the first five days of a hospitalization. This coverage looks like a good way to reimburse a portion of my deductible responsibility if I’m hospitalized. Can I purchase this coverage and remain HSA-eligible?

Answer: Yes. See Question 14. You can buy certain supplemental insurance coverage and remain HSA-eligible. These policies are not medical plans. They do not reimburse your medical claims. Rather, they compensate you for a financial loss by paying a fixed amount that you can then use to replace or supplement your income.

The three most common forms are:

Hospital. You experience a temporary loss of income during a hospital stay. These plans pay you a fixed amount – either per admission or per day up to a certain number of inpatient days – when you’re admitted to the hospital. You can use these funds to pay your out-of-pocket medical expenses or other personal bills.

Accident. You experience a temporary or permanent loss of income because of an accident. This type of policy specifies covered events and the amount of money that you receive if you experience a covered loss. Covered accidents may include medical emergencies, burns, broken bones, ruptured disks, loss of a limb, loss of eyesight or hearing, paralysis, and accidental death. You can use the funds to pay your out-of-pocket medical expenses associated with the accident or for other purposes.

Critical illness. You experience a temporary or permanent loss of income because of a critical illness. Like accident coverage, these plans specify covered events and the corresponding payment. They typically cover cancer, heart attack and other cardiac-related events, COPD, and other diseases. They compensate you, not medical providers, and you decide whether to use the funds to pay your medical expenses associated with the illness or other personal expenses.