Health Savings Accounts and ARPA COBRA Subsidy Eligibility

June 21, 2021

Many Americans currently save money for healthcare expenses through a Health Savings Account (HSA) paired with an employer-sponsored high deductible health plan (HDHP). However, due to the pandemic, many employees have lost their employer-sponsored health coverage.  This may impact their eligibility to contribute to an HSA. 

COBRA allows employees to continue healthcare coverage after they become unemployed. The cost of COBRA continuation premiums is temporarily being subsidized by the Federal government. The American Rescue Plan Act (ARPA), provides a 100% subsidy of COBRA premiums until September 30, 2021, but brings into question how those participating in an HSA may be affected by the subsidies.

Unlike a Flexible Spending Account (FSA), an HSA account is held by the individual, not by the employer. This distinction means that the individual can continue to contribute to their HSA even if they are no longer employed, as long as coverage remains, and eligibility requirements are met for an HSA-qualified plan. If the employer contributed to the account, they cannot withdraw previous deposits into the individual’s HSA. 

The ARPA COBRA subsidy provision does allow qualified Assistance Eligible Individuals (AEIs) to retain their Health Savings Account balances and has no effect on eligibility to fund an HSA. Subsidies offset premiums, not out-of-pocket expenses. If an individual receives the premium subsidy, they can fund an HSA account for current or future qualified medical, dental, vision, and over-the-counter expenses, plus Medicare, long-term care premiums, and COBRA premiums. Therefore, if an individual continues coverage through COBRA (or by collecting unemployment benefits), they can use their accumulated HSA account balance, as well as continue contributions, to pay premiums without tax penalty.

If the individual hasn't been covered by an HSA-qualified plan for all of 2021, but is enrolled by December 1, they can make a full-year contribution to their HSA up to the maximum amount permitted by the IRS.  However, the individual must remain HSA-eligible through the end of the following year. This is called the Last-Month Rule.  

For example, most COBRA rights extend 18 months. If an individual enrolls in COBRA effective April 1, their COBRA continuation would end September 2022. This means that an individual was not enrolled by December 1. If they fail to remain eligible during this “testing period,” any amount more than the prorated contribution will be included as part of the individual’s 2021 taxable income and subject to an additional 10% tax penalty on the excess contribution and any contribution earnings, unless it is withdrawn prior to the filing of their 2021 income tax return.

ARPA presents new opportunities for individuals to enroll in or continue contributing to an HSA while taking advantage of COBRA subsidies. To fully understand COBRA rights and Health Savings Account rules, employers are encouraged to review the new options created through ARPA.