Time to Thank Veterans - and Expand Their HSA Eligibility

Veterans should not have to choose between retaining their hard-earned medical benefits and contributing to a Health Savings Account.

It's unfortunate that current federal tax law penalizes military veterans when they want to retain and use their hard-earned military medical benefits and simultaneously contribute to a Health Savings Account. On this Memorial Day, let's dive into these conflicts.

VA Care

Veterans who receive care through the Department of Veterans Affairs medical network (commonly referred to as the VA system) are, with several exceptions, disqualified from funding a Health Savings Account for three months after they receive care there.

That's unfortunate. The VA system provides a level of continuity of care that other provider groups find difficult to match. Think about the number of medical plans that have covered you over the years as you (and, if applicable, your spouse) have changed jobs and moved. You may have had to change doctors or hospitals. Your medical records may be stored on different electronic systems that don't interface unless you request that records be sent and it actually happens. In contrast, a veteran can change jobs or move closer to family and still have her medical records stored in a single system that any VA provider can access easily.

And VA hospitals see a volume of service-related issues that allow them to identify and share best practices, often resulting in better care than all but high-volume non-VA providers can provide. It's a win-win for veterans to receive care at these facilities.

Health Savings Account rules discourage this care, however. Many services received through the system are disqualifying. Among those that are permitted:

Preventive care. The same preventive services that can be covered below the deductible on an HSA-qualified plan can also be delivered through the VA without disqualifying a patient from opening and funding a Health Savings Account.

Care for a service-related disability. This important provision was added to Health Savings Account law (through, of all things, a transportation bill, demonstrating once again how proposals often slip into unrelated legislation) several years ago. It permits patients to receive care stemming from a service-related disability (like Post-Traumatic Stress Disorder, treatment for cancers linked to the battlefield, or replacement of a prosthetic limb).

This provision delivered a huge benefit by allowing veterans with a service-related disability to receive care through a system specializing in these conditions without losing their eligibility to fund a Health Savings Account.

It's perhaps understandable why most VA care is disqualifying. Veterans pay little or nothing out-of-pocket when they receive services. This arrangement constitutes coverage of services below the deductible, which is disqualifying when the reimbursement is through another medical plan, Health FSA, or Health Reimbursement Arrangement. But perhaps VA care should be viewed differently because it's an earned benefit.

Consequences of Receiving Certain VA Care

When a veteran receives care that is not preventive or not connected to a service-related disability, she loses her eligibility to fund her Health Savings Account for the three months immediately following treatment.

Example: Sonja, an Air Force veteran, has her appendix removed at her local VA facility in September 2024. She can't contribute for the months of October, November, or December, thus limiting her contribution to 9/12 of her statutory ceiling.

In some cases, depending on the timing of care, a VA patient can make the full annual contribution even with the temporary loss of eligibility.

Example: Sonja schedules the same surgery in June. She can't contribute to her Health Savings Account for the months of July, August, and September. Sonja can either prorate her contribution (as she did above) or leverage the Last-Month Rule, a provision in tax law that permits her to contribute up to the statutory ceiling for any year during which she's HSA-eligible on Dec. 1. She then must remain HSA-eligible through the end of the following calendar year. If she fails to satisfy this testing period, she must withdraw any contributions beyond her prorated limit (plus any earnings on those disallowed contributions) and pay an additional 10% tax as a penalty.

If Sonja undergoes her surgery in November 2024, she must prorate her 2024 contribution because she's not eligible Dec. 1. Also, because her three months of ineligibility extend through February 2025, she can't contribute more than 10/12 of her 2025 maximum without invoking the Last-Month Rule and setting a testing period that requires her to remain HSA-eligible through the end of 2026 to keep the higher contribution.

TRICARE

Active military personnel and their families are covered by TRICARE, a medical plan run by the federal government. Retired military personnel are often permitted to retain this coverage for a low premium. Many choose to retain it, even if they move to the civilian workforce and enroll on an employer's medical plan, because it provides them with continuous secondar insurance. If they lose their primary coverage, they can rely on TRICARE rather than COBRA.

The issue: TRICARE doesn't offer an HSA-qualified plan. Thus, retired military personnel who remained enrolled on TRICARE coverage aren't eligible to open and fund a Health Savings Account. Even if they're otherwise eligible. Even if they never receive benefits from their TRICARE coverage.

Veterans earn the right to continue their TRICARE plans. But the federal tax code penalizes veterans who want to make or receive Health Savings Account contributions by forcing them to choose between the security of TRICARE as secondary coverage and building medical equity through a Health Savings Account.

Thanks for your service, but . . .

A Reasonable Path Forward

The next administration and Congress should work together to remove all VA care from the list of qualifying services. Let veterans who are otherwise HSA-eligible continue to fund their HSA regardless of where they receive medical care for any condition or whether they retain TRICARE coverage. We owe it to them not to punish our veterans by excluding them from the benefits of a Health Savings Account when they exercise the benefits that they've earned.

Fortunately, the environment is ripe to execute this change. The new Congress will be addressing many expiring provisions of the federal tax code (primarily due to the expiration of most of the 2017 Tax Cuts and Jobs Act). Changing these minor provisions of the tax code (with, perhaps, some additional changes to permit Medicare enrollees, both retirees and working seniors, to open and fund a Health Savings Account, and for patients of Direct-Primary Care arrangements to become HSA-eligible and to reimburse their monthly DPC fee with tax-free withdrawals from a Health Savings Account), will not be difficult.

In other words, the farmers will be preparing the fields. The seeds will be planted. We just need to place a handful of Health Savings Account seeds in that fertile soil.

The Bottom Line

Veterans were willing to pay the ultimate sacrifice to defend our country. It's unfortunate that federal tax law requires them to sacrifice the benefits of opening and funding a Health Savings Account if they take advantage of certain opportunities that they've earned. We owe it to them to remove these barriers so that they can retain their service benefits and, if otherwise HSA-eligible, contribute to a Health Savings Account.

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HSA Monday Mythbuster is published every other week, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.