Major revisions to health savings account rules for 2007
December, 2006
In one of its last acts before a Congressional majority switch in January 2007, the existing Congress passed the Tax Relief and Health Care Act of 2006 ("Act") on December 9, 2006. The Act contained several sweeping changes to the Health Savings Account ("HSA") rules and these are effective as of January 1, 2007.
Funding HSA With HRA, FSA or IRA
The new law allows an individual to seed a health savings account with a HRA, FSA or even an IRA transfer. This amount is a rollover transfer and for HRA and FSA transfers, it does not impact the individual's ability to otherwise contribute to the HSA. However, an IRA rollover is a contribution to the HSA and does impact the amount an individual may otherwise contribute to the HSA.
Simplified Deduction Limitation on HSAs
Instead of the previously existing rule that a contribution to the HSA must be the lesser of the HDHP deductible or the annual maximum, the new law annual limitation for a contribution to a HSA is the annual maximum amount, $2,850/$5,650. This presents a tremendous planning opportunity for employees to use HSAs as a deferral mechanism regardless of the HDHP deductible and provides a much needed simplification for plan sponsors and advisors alike.
Partial Year Participation/Maximum Deduction
In what is perhaps the most exciting provision of the Act, an individual may now participate in just the law month of a calendar year and be eligible to make a contribution to the annual maximum as if he or she were a participant for the entire year, as long as the participant remains eligible for the HSA over the following 12 months (testing period).
FSA Grace Period/Comparability Rules/Cost of Living Adjustments
In a few rules with minimal impact, an individual is no longer disqualified from making HSA contributions simply because he or she is participating in a FSA utilizing the 2½ month grace period. The Act amends the HSA rules to allow for non-comparable contributions to Highly Compensated Employees, most employers use Cafeteria Plans or other methods to avoid this rule currently and likely will continue to do so despite the law's exception. Finally, the IRS is directed to make any Cost of Living Adjustments to annual maximum by June 1st of the year prior providing a welcome opportunity for employers and advisors to plan for the following year in advance rather than receiving the limitations in early November.