Legislation aids health savings accounts

According to Health Care News – Vol. 8, No. 2 in February – HSA enrollment has doubled in the last year and comprises nearly 10 percent of the private benefits market. Several changes occurred in January for HSAs as part of the Tax Relief and Health Care Act of 2006. This legislation aims to create tax incentives and make health savings accounts more enticing to employers and employees.

Transfers and contributions

One provision of the legislation allows employers to make a one-time balance transfer from an employee’s flexible spending or health reimbursement arrangements account to an HSA. Transfers may occur until Jan. 1, 2012, and those who decide to transfer funds are required to keep a high-deductible health plan for a minimum of 12 months after the transfer. The balance transfer provision is designed to increase HSA enrollment and aid employees’ access to health savings funds.

A second provision to the legislation enables individuals to contribute funds from their individual retirement accounts to an HSA if the contribution amount does not exceed the yearly limit. This change will help those who are unable to fund their HSAs with direct contributions by allowing them to rollover money from their IRAs. By doing so, individuals gain a tax perk because IRA funds for medical expenses are taxable, while HSA distributions are not.

Previously, individuals were not allowed to gain benefits simultaneously from flexible spending and health savings accounts, but a third provision addresses contributions during the FSA grace period, which is about two-and-a-half months. The legislation enables people who are switching from an FSA to an HSA to make contributions to the FSA and still remain covered for the duration of the grace period. This provision is relevant because the millions of people who are covered by FSAs can now enroll for an HSA without penalties.

Deductibles and adjustments

Another feature of the law repeals the annual deductible limits on HSAs. The old law required individuals to fund their HSAs up to their qualified health plan deductible or their annual contribution limit. This change allows people to make contributions up to the federal contribution limit, even if the amount is more than their annual deductible through a high-deductible health plan. This change is important because it creates more tax-advantaged savings through HSAs.

Another change involves the earlier release of cost-of-living adjustment information. The government is now required to release its data on cost-of-living changes for HSAs by June 1 every year. These changes include the minimum required deductible for a high-deductible health plan, maximum out-of-pocket limits for such plans and HSA contribution limits. This provision is relevant because in the past, the government has not released this information until fall. This may have impeded advance planning by some employers who might otherwise offer HSA options..

Though all other provisions took effect by Jan. 1, the cost-of-living modifications will take effect Jan. 1, 2008.

Enrollments and requirements

The legislation also made changes in relation to midyear enrollment. In the past, a person who enrolled in an HSA in the middle of the calendar year could only contribute a prorated amount; however, the deductible was not prorated. This provision enables people to fully fund their HSA when they enroll midyear, as long as they keep their high-deductible health plan for 12 months. Otherwise, they will face a 10 percent tax penalty and the loss of the deduction. By allowing people to fully fund their HSAs midyear, a major roadblock is lifted that kept many employers whose plans did not correspond with the calendar year from offering HSAs. In addition, new employees who are hired midyear can participate.

Finally, the Tax Relief and Health Care Act made an exception to the comparable contribution requirement. The tax code mandated that employers make “comparable contributions” to HSA accounts for their employees, but employees who were paid less were not compensated as much. The new provision allows employers to fund the HSA accounts of lower-paid workers at a higher level.

In review, the new HSA legislation alleviates some of the constraints that kept employers and employees from considering health savings accounts.

Andrea Croley is co-owner of Croley Insurance and Financial in Springfield. She may be reached at acroley@croleyinsurance.com.[[In-content Ad]]