News: Health Savings Accounts Now More Flexible for Pre-Tax Health Care Benefits

News: Health Savings Accounts, HSA, Medical Care  Tax Relief and Health Care Act of 2006, Taxpayers, Flexible Health Care Options

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In an effort to make it easier for Americans to put money aside for their personal health care, President Bush signed The Tax Relief and Health Care Act of 2006 (HR611 I) on December 20, 2006.

Among other items, the bill makes Health Savings Accounts (HSA) more flexible, which allows taxpayers to have more choices for the medical care they need.

Provisions of the bill relating to HSAs include:

1. An increase in the Annual HSA Contributions - The new law no longer limits HSA contributions to the amount of the plans deductible, if less than the set statutory maximum contribution. For 2007, HSA participants will be allowed to contribute $2,850 for self coverage or $5,650 for individuals with family coverage.

   Additionally, catch-up contributions to bring HSA accounts to these new levels continue to apply, if the individual is age 55 or over. $800 is the maximum catch up amount allowed for 2007. Both spouses can contribute, if eligible, but they would require separate HSAs.

2. Full Year HSA Contributions for Mid-Year Enrollees - eligible individuals may deposit the full allowable annual contribution to their HSA accounts no matter when they enrolled during the year. However, to avoid additional taxes and penalties, the individual must remain eligible for the entire next calendar year.

3. Certain Flexible Savings Account Coverage Treated as Disregarded - Previously, Flexible Spending Accounts (FSA) included a grace period following the end of the plan year that allowed participants to claim additional reimbursable expenses for that year. This provision disqualified an individual from establishing an HSA until the first day of the month following the end of the grace period.

   The Act changed earlier guidelines; the FSA grace period does not disqualify you if: (a) the balance at the end of the plan year is $0, or (b) the entire remaining balance is transferred directly to an HSA.

4. One Time Transfer from an Individual Retirement Account (IRA) to an HSA - the act now allows participants to make a one time transfer of funds from an IRA to their HSA if contributions are made in a direct trustee-to-trustee transfer from an IRA.

   Participants utilizing the IRA to HSA transfer option must remain eligible for 12 months following the transfer or the amount will be taxable and an additional tax of 10% applies.

5. Rollovers from FSAs and HRAs into HSAs - The Act allows employers with cash balances in their FSAs and Health Reimbursement Accounts (HRA) as of September 21, 2006 to make a one time rollover to an HSA by 2012.

   However, based on their Notice 2007-22, published on February 15, 2007 the Internal Revenue Service (IRS) issued a number of specific guidelines to regulate rollovers, including the fact that each employee must individually elect to roll over their account balances.

   For all the requirements of this clause, read the complete IRS Rollover Guidelines. (PDF opens in new window)

Additional provisions of the Act include greater contribution allowances for lower paid employees; and earlier cost of living indexing, which moves the end of the base period from August 31 to March 31.

For more information about HRAs and the new provisions, visit the U.S. Treasury Department web site, http://www.ustreas.gov/offices/public-affairs/hsa. (Opens in new window)

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