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NEW HEALTH SAVINGS ACCOUNT LEGISLATION EFFECTIVE JANUARY 1, 2007
On December 20, 2006, President Bush signed into law the Tax Relief and Health Care Act of 2006. This legislation, among other things, provides for some dramatic changes to the rules for Health Savings Accounts (HSA's).
This legislation which is effective January 1, 2007, contains the following HSA provisions:
- HRA/FSA Rollovers - An employer can rollover a participant's Health Reimbursement Account (HRA) and/or Health Care Flexible Spending Account (HCFSA) balance to an HSA. These rollover amounts are over and above the amounts allowed for annual contributions and are limited to the lesser of the current HRA/HCFSA account balance or the HRA/HCFSA account balance as of September 21, 2006. Rollovers are limited to one rollover for each HRA and HCFSA of the participant. The rollover amounts are excludable from gross income and wages for employment tax purposes, and are not deductible. The participant must remain an eligible individual (i.e., enrolled in a qualified High Deductible Health Plan (HDHP)) for 12 months following the month in which the rollover occurred, or the rollover amount will be taxable and subject to a 10% penalty. An exception is provided in cases where the individual became ineligible due to death or disability. (This rollover provision is effective through 2011).
- IRA Transfers - A one-time direct trustee-to-trustee transfer of funds from a participant's IRA to his/her HSA is allowed. The transferred amount is limited to the applicable annual HSA maximum and cannot be taken as a tax deduction. The transfer can be made with out being subject to tax or subject to penalty. The amount transferred from the IRA reduces the amount that can otherwise be contributed to the HSA for the year. The participant must remain an eligible individual (i.e., enrolled in a qualified HDHP) for 12 months following the month in which the transfer occurred, or the transfer amount will be taxable and subject to a 10% penalty. An exception is provided in cases where the individual became ineligible due to death or disability. This transfer is generally limited to once in an individual's lifetime. There is, however, an exception where an eligible individual goes from individual to family coverage in the taxable year in which the initial IRA to HSA transfer occurs.
- Full Annual Contribution Allowed Regardless of When A Participant Becomes Eligible - A participant who becomes covered under a qualified HDHP at anytime during the year will be permitted to make the full annual HSA contribution for that year. However, if the participant becomes covered in any month other than January, the participant must remain an eligible individual (i.e., enrolled in a qualified HDHP) for 12 months following the end of the taxable year in which they became covered under the HDHP, or the amount contributed under this new provision will be taxable and subject to a 10% penalty. An exception is provided in cases where the individual became ineligible due to death or disability.
- Certain FSA Coverage Disregarded for HSA Eligibility - A participant enrolled in a HCFSA with a grace period is no longer barred from participating in an HSA during the grace period under certain conditions. The HCFSA participant will not be ineligible for an HSA, if the participant's HCFSA balance is zero as of the end of the FSA plan year, or the year-end HCFSA balance in transferred to the participant's HSA.
- Increase in Annual HSA Contribution Amounts - Previously contribution amounts were limited to the lesser of the qualified HDHP deductible or the annual statutory maximums. Effective January 1, 2007 the maximum contribution for a participant will be the applicable individual or family statutory maximum regardless of the actual deductible amount. The statutory maximums for 2007 are $2,850 for individual coverage and $5,650 for family coverage.
- Earlier Release of HSA Maximums - HSA statutory maximums for future years will be announced in June of the preceding year. Thus the maximums for 2008 will be released in June 2007. This expedited release will allow an employer more time to make plan design-related decisions and update enrollment materials. It will also give the participant more time to consider their options for the upcoming year.
- Higher Contributions Allowed for Nonhighly Compensated Employees - An employer can choose to make higher contributions to the HSAs of nonhighly compensated individuals when compared to highly compensated individuals outside of a cafeteria plan. An employer can now do so without running afoul of the HSA comparability rules.
While these changes present expanded options for both the employer and the participant, please keep in mind the applicable restrictions when implementing these provisions.
If you have any questions regarding this legislation, please do not hesitate to contact our office.