President Bush signed the Health Opportunity Patient Empowerment Act of 2006 on December 20, 2006. The law, part of the Tax Relief and Health Care Act of 2006, provides new opportunities for health savings account (HSA) participants' to build their funds.
HSA Provisions of the Act include:
A Provision repealing the annual plan limitation on the HSA contribution is effective for taxable years beginning after 12/31/06. Allowing HSA contributions up to the full statutory maximum without regard to the individual’s HDHP deductible amount. The maximum annual contribution that can be made to an HSA is $2,850 for self only coverage and $5,650 for family coverage for 2007.
A Provision for one time rollover from Health FSA or HRA to HSA effective for taxable years beginning after 12/31/06. Employers can transfer funds from Flexible Spending Arrangements (FSAs) or Health Reimbursement Arrangements (HRAs) to an HSA. The one time rollover of Health FSA and/or HRA amounts (a Qualified HSA Distribution) is the balance in the FSA or HRA as of September 21, 2006, or if less, the balance as of the date of the transfer (Excluding incurred but noy yet reimbursed claims). The provision is limited to one distribution with respect to each Health FSA or HRA of the individual. The Qualified HSA Distribution is treated as a rollover contribution for HSA purposes; therefore, it does not decrease the amount that may be contributed to the HSA during the year.
If an individual does not remain an eligible individual for the 12 months following the month of the distribution, the transferred amount is included in income and subject to a 10 percent additional tax.
The rule only applies to participants who have an HRA or health FSA on September 21, 2006.
A modified comparability rules applies with respect to the FSA or HRA rollover. If the employer allows any employee the ability to make contributions to the HSA from distributions from a health FSA or HRA, then all employees who are covered under a HDHP must be allowed to make such a distribution.
A Provision disregarding certain FSAs coverage is effective for taxable years beginning after 12/31/06. Coverage under a health FSA during the “grace period” immediately following the end of a plan year is disregarded when considering eligibility of the individual for an HSA, if the balance in the health FSA at the end of the plan year is zero or the entire remaining balance in the health FSA at the end of the plan year is contributed to an HSA.
However, participants whose plan year ending balance is greater than the Health FSA balance on September 21, 2006, and are therefore unable to rollover the entire balance to an HSA and who do not incur enough expenses prior to the end of the plan year equal to the ending balance will continue to be ineligible for an HSA until the end of the grace period.
A Provision for earlier cost-of-living adjustments is effective for taxable years beginning after 2007. Cost of living adjustments will be determined as of the close of the 12-month period ending March 31 rather than August 31 and must be published no later than June 1st.
A Provision allowing contributions for months preceding the month that the taxpayer is eligible individual is effective for taxable years beginning after 12/31/06. Individuals who are eligible individuals anytime on or before the first day of December are treated as having been an eligible individual for every month during the taxable year for purposes of computing the amount that may be contributed to the HSA. If an individual becomes ineligible during the testing period beginning with the last month of the taxable year in which they first became eligible and ending on the last day of the 12th month following such month (must remain eligible during the following calendar year), the amount of contributions attributed to months preceding the month in which the individual was an eligible individual will be includable in taxable income and an additional 10% tax applies. Taxable in year they become ineligible.
Example: Employee was eligible all for tax year 2007, then changes to an ineligible health plan on 1/1/08, but still has an HSA account. The employee enrolls in a qualified HDHP effective 2/1/08, they can contribute for all of 2008. Also the amount they can contribute for January of 2008 is based on the maximum allowed for the tier(single or family) that they were enrolled in for the month of December 2008.
Example: An employee is hired November 15, 2007 and has enrolled in HDHP family coverage effective December 1, 2007 and is therefore eligible for HSA on December 1, 2007. The employee will be allowed to contribute the maximum allowed for family coverage for the entire taxable year of $5,650.
Example: An employee is hired November 15, 2007 and has enrolled in HDHP family coverage effective December 1, 2007 and is therefore eligible for HSA on December 1, 2007. The employee will be allowed to contribute the maximum allowed for family coverage for the entire taxable year of $5,650. The employee becomes ineligible on 3/1/2008, therefore, the amount of $5,179.13 (the total contributed for the first 11 months of 2007 prior to the month they first became eligible ($5650./12*11)) becomes taxable and is subject to the 10% additional tax.
Note: The amount an individual can contribute under this provision can be complicated.
Example: Suppose an individual had a non-HDHP self-only coverage January 1, 2007 through April 30, 2007, then HDHP self-only coverage May 1, 2007 through October 31, 2007. On November 1, 2007 the individual switched to HDHP family coverage for the remainder of the year.
The individual’s HSA contributions for May through October 2007 likely will be based on the HDHP self-only coverage maximum of $2,850 ($2,850/12*6=$1,425). The individual’s HSA contributions for November and December likely will be based on the HDHP family coverage maximum of $5,650 ($5,650/12*2=941.67). The individual’s contribution limitation for his or her January through April coverage is apparently based on the HDHP family maximum of $5,650 ($5,650/12*4=1883.32), even though the individual had self only coverage during that time period and then immediately switched into another self only coverage.
Also, note that the varying contribution amount can create administrative issues for the cafeteria plan administrators because the amount contributed can vary so often.
A Provision modifying comparability rules for non-highly compensated employees is effective for taxable years beginning after 12/31/06. Allows employers to make larger HSA contributions for non-highly compensated individuals than for highly compensated individuals. However, comparability rules apply for all non-highly compensated individuals.
A Provision for one time rollover from IRAs to HSAs effective for taxable years beginning after 12/31/06. The new rules allow for a one-time contribution to an HSA of amounts distributed from an Individual Retirement Arrangement (IRA). The contribution must be made in a direct trustee-to-trustee transfer. The IRA transfer will not be included in income or subject to the early withdrawal additional tax.
Unlike Health FSA/HRA transfers, the IRA transfer is not treated as a rollover contribution. Thus any amounts transferred from the IRA to the HSA during the year reduce the maximum amount that may otherwise be contributed to the HAS during the year. Only one transfer may be made during the lifetime of an individual. If an individual electing the one-time transfer does not remain an eligible individual for the 12 months following the month of the contribution, the transferred amount is included in income and subject to a 10% additional tax.
Note: Employers must amend the Cafeteria and Health Reimbursement Arrangement Plan Documents and SPDs to allow for rollovers from a Health FSA/HRA to the HSA prior to employees making such rollovers.
Further guidance is needed on:
· Whether an employer has discretion over making Qualified HSA distributions available.
· Must employers make HSA distributions available until January 1, 2012?
· May employers force employees to make Qualified HSA distributions if the employer wishes to establish an HSA on behalf of the employee without the employee’s consent?
· Are employee’s allow to make a mid year rollover from FSA to HSA or is it a prohibited transaction under the Cafeteria Plan rules?
Click here to print a copy of the HSAToday IRA/FSA/HRA Transfer Request Form.