In the waning days of 2006, the rules regarding Health Savings Accounts (HSAs) were one of the areas of tax law addressed and were significantly liberalized. This Article will briefly discuss the recent HSA enhancements made that might be of interest to your company and employees. Unless otherwise indicated, all changes are effective for tax years beginning on or after January 1, 2007.
Plan deductible limit on contributions removed
Until now, annual contributions to an HSA were limited to the lesser of the annual statutory limit or the actual plan deductible in place. The new law removes the plan deductible amount as a limiting factor.
First year contributions expanded
For individuals who become covered in a month other than January; they may now make a deductible contribution for the full year. The prior law limited the contribution amount based on an individual's covered months. To take advantage of this new rule, an individual must be covered by an HSA during the last month of the year, and continue to be eligible for the next twelve months.
Rollovers from Health FSAs and HRAs to HSAs
Beginning December 20, 2006, through 2011, HAS participants can transfer funds from a Flexible Spending Arrangement (FSA) or Health Reimbursement Arrangement (HRA) to an HSA. The amount can’t exceed the lesser of:
Only one transfer from each health FSA or HRA of an individual is allowed and the individual making the transfer must remain enrolled in an HSA for 12 months following the transfer. Failure to comply renders the transferred amount taxable and subject to a 10% penalty.
The new rule is meant to assist individuals transferring into a high deductible health plan (HDHP).
Rollovers from IRAs to HSAs
Effective with tax years as of January 1, 2008, individuals may make a one-time-only tax-free rollover from an Individual Retirement Account to an HSA. The rollover amount is limited to the maximum deductible HSA contribution for the year the rollover occurs. Any rollover amount reduces the total that could otherwise be contributed to the HSA.
The above are some of the more dramatic changes made to HSAs in this legislation. There are other provisions contained in the law which liberalize the rules regarding FSA grace period coverage, change the comparability rules for certain employer contributions, and other changes. You should consult your benefits advisor for the particulars if you are interested in implementing any of the changes discussed here.