HSAs Expanded in Last Days of Congress

Congress gave final approval to H.R. 6111, the "Tax Relief and Health Care Act of 2006", with provisions that expand Health Savings Accounts (HSAs) and incorporates provisions from H.R. 6134, the "Health Opportunity Patient Empowerment Act of 2006". The new provisions would make several improvements to the HSA program.

In September, Ways and Means Chairman Bill Thomas (R-CA) said, "HSAs are still relatively new, but we are already seeing them grow in popularity. The adjustments in this bill will make HSAs more attractive as Americans consider their health insurance options."

H.R. 6111 includes the following provisions impacting HSAs:

Expands HSA Funding Sources

Allows employees a one-time opportunity to roll over unused funds from an existing Flexible Spending Account (FSA) and/or Health Reimbursement Arrangement (HRA) for deposit to their HSA. The employee has the ability to start an HSA by making a one-time, tax-free transfer of FSA and HRA funds in their accounts as of September 21, 2006, to an HSA which would belong to the employee. The transfer must be made by January 1, 2012.

Allows for a one-time transfer from Individual Retirement Accounts (IRAs) to HSAs. Taxpayers are allowed to make a one-time distribution from an IRA to an HSA so that the HSA funds are available immediately to meet family health needs, but the "roll-over" cannot exceed the HSA contribution limit for the year and it is subject to the applicable recapture taxes to the part year coverage provision (described below).

Expands HSA Contribution Annual Limits

Repeals HSA annual deductible limitation on contributions to allow the individual with HSA qualified policies with deductibles below the annual current contribution limits of $2,700 for self-only coverage and family coverage for $5,450, to contribute up to these maximums every year. This would change the current contributions that are limited to the policy deductible if below the annual contribution limits.

Allows for full-year contributions for part-year coverage so a taxpayer whose HSA-qualified coverage begins mid-year is permitted to make a contribution equal to their policy deductible for the year or the annual contribution limit, if higher (noted above). This is an aid to anyone who begins HSA-qualified coverage into the year and is subject to entire calendar year deductibles, allowing a full annual contribution to be made, rather than a method of pro-rating the contribution based on the number of months of qualified coverage. Taxpayers would be required to maintain a high deductible plan for a whole year, beginning in the month the HSA begins or they pay tax on the contribution and a penalty of 10 percent.

Help for Lower Salaried Workers from Employers

Employers are allowed to make additional contributions for lower paid employees by an exception to the current "comparability rules" by making the employer more flexible in providing more assistance to lower salaried workers in the form of contributions to their HSA accounts. Before the "exception", employers were required to make equal dollar contributions to all HSA eligible workers with similar coverage and work status.

Earlier Notification

The results of the indexed rate for inflation on the minimum deductible, out-of-pocket limits for HSA-qualified policies and contribution annual limits must be announced by June 1 of each year, instead of November 1, by the Treasury Secretary. This is to help banks, insurance companies, credit unions and taxpayers in planning decisions.

Tim Morales, President of HSA Clearing said, "These provisions are simple, common-sense improvements to HSAs that will help more Americans take advantage of the great benefits that HSAs offer."

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