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HSA

By Stephen Miller, December 2006

In the early hours of Dec. 9, Congress gave final approval to H.R. 6111, the Tax Relief and Health Care Act, which includes provisions that are likely to make health savings accounts (HSAs) more appealing to employees and employers. The bill’s highlight: an increase in the amount that may be contributed to HSAs to pay for medical expenses and to save for future health care needs.

"HSAs are still relatively new, but we are already seeing them quickly grow in popularity in the early stages of their existence," Ways and Means Chairman Bill Thomas, R-Calif., said in a statement. "The adjustments in this bill will make HSAs more attractive as Americans consider their health insurance options."

"These provisions are simple, common-sense improvements to HSAs that will help more Americans take advantage of the benefits that HSAs offer," says Tim Morales, president of HSA Clearing Corp., a business advisory firm.

The newly enacted provisions will:

• Expand funding sources for HSAs by:

• Allowing an employee a one-time opportunity to roll over unused funds from an existing flexible spending account (FSA) and/or health reimbursement arrangement (HRA) to deposit in their HSA. Under this bill, employees would have the ability to start an HSA by making a one-time tax-free transfer of FSA and HRA amounts in their accounts to an HSA that would belong to the employee. The transfer must be made before Jan. 1, 2012.

• Allowing one-time transfers from individual retirement accounts (IRAs) to HSAs. The bill permits taxpayers to make a one-time distribution from an IRA to an HSA so HSA funds are immediately available to meet family health needs. The rollover cannot exceed the HSA contribution limit for the year and is subject to the recapture taxes applicable to a part-year coverage provision.

• Expand the annual limits on HSA contributions by:

• Repealing the annual deductible limitation on HSA contributions. The bill allows individuals with HSA-qualified policies that have deductibles below the annual contribution limits (currently $2,700 for self-only coverage and $5,450 for family coverage) to contribute up to these maximum amounts each year. Currently, contributions are limited to the policy deductible if below the annual contribution limits.

• Allowing full-year contributions for part-year coverage. The bill would permit taxpayers whose HSA-qualified coverage begins mid-year to make a contribution equal to their policy deductible for the year (or the annual contribution limit, if higher). This will help people who begin their HSA-qualified coverage partway through the year and who are subject to the entire calendar-year deductible by allowing them to make a full annual contribution, rather than prorating their contribution for the number of months of HSA-qualified coverage. Taxpayers would be required to maintain a high-deductible plan for a full year beginning in the month the HSA begins or pay tax on the contribution and a 10 percent penalty.

• Provide additional flexibility for employers to help lower-paid workers by:

• Allowing employers to make additional contributions for lower-paid workers. The bill provides an exception to the current "comparability rules" that require companies to make equal dollar contributions to all HSA-eligible employees with similar coverage (single or family) and work status (full time or part time). This provision will give employers flexibility to provide greater assistance to their lower-paid workers in the form of contributions to their HSA accounts.

• Requiring earlier notification of cost-of-living adjustments. Under current law, the minimum deductible and out-of-pocket limits for HSA-qualified policies, as well as the annual contribution limits, are indexed for inflation. The bill requires the secretary of the Treasury to announce adjustments to the amounts by June 1 of each year. Currently, the adjustments are not announced until November each year. Earlier notification is intended to simplify planning decisions for employers and taxpayers.

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