Health Savings Accounts

On Saturday, December 9, 2006, Congress passed H.R. 6111 (the “Act”), which includes, among other things, various improvements to Health Savings Account (“HSA”) rules. The Act’s HSA related provisions are mostly effective January 1, 2007. The Act improves existing HSA related rules in the following ways:

• Eliminates the lesser of deductible and statutory limit contribution rule by allowing HSA contributions up to the full statutory maximum (based on single or family coverage) without regard to the individual’s HDHP deductible amount.

• Allows full-year contributions for individuals who enroll in an HDHP mid-year, provided certain conditions are satisfied.

• Allows a one time tax free rollover of Health FSA and/or HRA amounts (a Qualified HSA Distribution) to an HSA, provided certain conditions are satisfied (this provision is effective upon enactment but expires January 1, 2012).

• Allows a one time tax free trustee-to-trustee transfer of IRA funds to an HSA (a Qualified HSA Funding Distribution), provided certain conditions are satisfied.

• Eliminates the negative impact of a Health FSA grace period on HSA eligibility for a Health FSA participant that has a zero balance on the last day of the plan year or who transfers the entire balance by way of a Qualified HSA Distribution on or before the last day of the year.

• Requires Treasury to publish cost of living adjustments (COLA) for HSAs no later than June 1 of the preceding year.

• Allows the employer to contribute greater contributions for non-highly compensated employees without violating the HSA comparability rule.

The Act’s HSA provisions are generally good news for HSA accountholders, HSA custodian/trustees, HSA administrators and employer/plan sponsors, but there are nuances of the Act that remain to be addressed. For example, will a rollover from an FSA/HRA affect ERISA applicability of the HSA? Moreover, will a decision by a participant to make a mid-year Qualified HSA Distribution from a Health FSA violate the Code Section 125 election change rules? Both Treasury and the Department of Labor may have to chip in additional guidance to shore up some loose ends.

All interested parties should quickly become familiar with the new rules. The rapidly approaching effective date will require employers, HSA custodians and administrators to quickly communicate the changes to HSA accountholders. For example, quick communications to Health FSA participants regarding the need to spend down or transfer an FSA account balance by plan year end is imperative to ensure that participants in a Health FSA with a grace period are eligible for an HSA at the beginning of the year as opposed to the first month following the end of the grace period. Also, trustees and custodians will need to act quickly to accommodate the many provisions under the Act, such as coordinating trustee-to-trustee transfers from IRAs.

Compliance Corner Jan 2007: Congress Improves HSA Rules for 2007
Source www.conexis.com