New Law Makes Health Savings Accounts More Attractive

The following changes to HSA become effective in 2007:

Ability to Make Larger HSA Contributions

Repeal of Annual Plan Deductible Limit

In 2006, an individual's maximum annual HSA contribution was the lesser of the annual deductible under the qualified high deductible health plan in which he/she participated and a statutory amount.  For 2007, the statutory amount is $2,850 for individuals enrolled with single coverage and $5,650 for family coverage.  The maximum will not longer be tied to the annual deductible.  An individual can contribute up to the statutory amount, as long as he/she is enrolled in a qualified high deductible health plan.  A qualified high deductible health plan provides only preventive care before the deductible is met and has a minimum deductible of no less than $1,100 for single coverage or $2,200 for family coverage.

Full Year Contribution for Partial Year Participants

Under current law individuals who do not become participants in a qualified high deductible health plan until after the beginning of the year have a lower prorated annual contribution limit.  In 2007, this restriction is being lifted.  If an individual doesn't become enrolled in a high deductible health plan until later in the year, he/she may still make the full annual contribution as long as the individual is enrolled in the qualified high deductible health plan for the last month of the year and the entire following year.

Rollovers

The law has two new rollover options.

From Health FSAs and HRAs

A one-time rollover of a limited amount from a health FSA or HRA to an HSA is available.  The rollover amount is not taken into account for purposes of the individual's annual HSA contribution limit.  The rollover amount is coordinated with and counted against the individual's other contributions toward the annual limit.  To qualify for a rollover the individual must continue to be enrolled in the qualified high deductible health plan for the following year.

An employer is not required to amend their plan to provide for this rollover opportunity.

From IRAs

A one-time rollover from an IRA to a HSA is also available.  The rollover amount is coordinated with and counted against the individual's other contributions toward the annual limit.  To qualify for a rollover the individual continue to be enrolled in the high deductible health plan for the following year.

Elimination of Flex Grace Period Issue

Currently, a participant in a qualified high deductible health plan and HSA cannot participate in a health FSA unless it is amended to only reimburse expenses for certain "limited purposes" such as dental and vision care.  The IRS now allows flex plans to offer up to a two-and-a-half month grace period following the end of the plan year to incur and submit additional claims to minimize the effect of the use-it-or-lose-it forfeiture rule.  Under current law, if an employee is enrolled in a general purpose health FSA for calendar year 2006 and that health FSA provides for a two-and-a-half month grace period until March 15, 2007 and if the individual enrolls in a qualified high deductible health plan as of January 1, 2007, the individual will not be eligible to make HAS contribution until April 2007.  The new Act provides that the grace period will be disregarded for purposes of determining an individual's HSA eligibility as long as the individual's year end health FSA balance is zero or if the year eand health FSA blance is rolled over to the individual's HSA.

If you have any questions contact, Patrick Harrington - patrick@mirha.com
517-394-1710