January 19, 2007

On  December  20,  2006,  President  Bush  signed  the  Tax  Relief  and Health Care Act of 2006.  Effective January 1, 2007, this Act improves Health Savings Accounts (“HSAs”) in various ways.

Increase in Contribution Limit.   Previously, the maximum HSA contribution  was  the  lesser  of  (i) the  deductible  under  the  applicable  high- deductible health plan (the “HDHP”), or (ii) a statutory maximum.  Under the new rules, the limit is the statutory maximum (indexed for inflation), regardless of the HDHP’s deductible.   For 2007, the maximum HSA contribution for an eligible individual with self-only coverage is $2,850, and the maximum HSA contribution for an eligible individual with family coverage is $5,650.

Rollovers  and  Transfers  to  HSAs.     The  new  legislation  allows rollovers from existing health Flexible Spending Accounts (“FSAs”) and Health Reimbursement Arrangements (“HRAs”) into HSAs through 2011.  Rollovers to HSAs are available once for each type of account and are limited to the balances of these accounts on September 21, 2006.  These rollovers are permitted over and above the annual contribution limit.  One-time rollovers from Individual Retirement Arrangements (“IRAs”) are also permitted, but these transfers are subject to the annual contribution limit.

Interaction with FSA Grace Periods.  Previously, if a health FSA had a grace period allowing participants to incur additional reimbursable expenses following the end of the calendar year, participants were disqualified from making HSA contributions during that period.  Now, so long as the individual’s health FSA balance is zero (or is transferred to the HSA) at the end of the calendar year, he or she will be permitted to make a full HSA contribution for that particular year.

Full Contribution During Years of Partial Eligibility.  A common barrier to switching to HSA-eligible coverage mid-year has been eliminated.  In the past, the HSA contribution was pro-rated based on the number of months that an individual was eligible for the HSA.  Now, an individual who becomes eligible mid-year can make the full HSA contribution for that year without tax penalties so long as he or she maintains eligibility to make HSA contributions through at least November of the next year.

Please click here for a PDF of this newsletter.