Builders and Contractors Exchange
Weekly Bulletin: 30 March 2007
New Rules For Health Savings Accounts
By: Geoffrey G. Hemphill
Tax Relief and Health Care Act of 2006 became law in December 2006. With the signing of this law, employees were given a few more choices in the way they pay for health care. Specifically, the Act made modifications to Health Savings Accounts (HSA) that will potentially provide more flexibility.
Background:
An HSA is an account that is established for an employee that is paired with a “qualified high-deductible health care plan.” For 2007, the minimum deductible for such plans is $1,100 for single coverage and $2,200 for family coverage. HSAs reimburse participants for eligible medical expenses. The HSA is owned by the employee, is fully portable, and allows a participant to carry over any unused money to subsequent plan years and potentially cash out tax-free dollars at retirement. Contributions are subject to an annual statutory limit (2007 Contribution Limit = $2,850 for single or $5,650 for family coverage).
One-Time Rollover from IRA to HSA.
The new Act allows a one-time, tax-free transfer from a participant’s IRA to his or her HSA. The rollover amount cannot exceed the regular HSA contribution limit.
Contribution Limit Not Bound by Deductible.
The old rule was that the Contribution Limit could not exceed the lower of: (i) statutory limit; or (ii) the amount of the deductible of the plan. The new Act removed the deductible constraint, so that the statutory limit applies regardless of the deductible amount.
Mid Year Eligibility.
The new Act allows participants who become eligible for the HSA in mid year to contribute up to the maximum contribution limit. The old rule required a reduction based upon the months left in the year.
Rollovers From FSAs and HRAs.
The new Act permits rollovers of the unused balances from Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) into HSAs. This is only available for those changing from an FSA or HRA to an HSA. If you have an HSA, you cannot also participate in an FSA or an HRA.
As with any tax benefit bestowed by the Internal Revenue Code, there are penalties for failure to comply with all applicable requirements. You should consult your tax advisor before taking advantage of these new rules.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.