Congress Expands Health Savings Accounts for 2007

109th Congress Expands Health Savings Accounts --December 9, 2006--The U.S. Congress gave final approval on Friday 12/08/06 to H.R. 6111, the "Tax Relief and Health Care Act of 2006" which included provisions expanding Health Savings Accounts (HSAs).

SUMMARY of HSA Provisions in the Tax Relief and Health Care Act of 2006:

Expands Funding Sources for HSAs

• Allows 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 Health Savings Account. 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 as of September 21, 2006 to an HSA which would belong to the employee. The transfer must be made before January 1, 2012.
• Allows one-time transfers from Individual Retirement Accounts (IRAs) to Health Savings Accounts. The bill allows 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 "roll-over" cannot exceed the HSA contribution limit for the year and is subject to the recapture taxes applicable to the part year coverage provision described below.

Expands the Annual Limits on HSA Contributions

• Repeals the annual deductible limitation on HSA contributions. The bill allows individuals with HSA-qualified policies that have deductibles below the annual contribution limits (for 2007, $2,850 for self-only coverage and $5,650 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.
• Allows full-year contributions for part-year coverage. The bill will allow taxpayers whose HSA-qualified coverage begins mid-year to make a contribution equal to the annual contribution limit. This will help people who begin their HSA- qualified coverage part way through the year and who are subject to the entire calendar-year deductible by allowing them to make a full annual contribution, rather than pro-rating 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.

Earlier Notification of Cost of Living Adjustment

• 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 1st of each year. Currently, the adjustments are not announced until November each year.