Beginning in January 2007, the good news about Health Savings Accounts (HSAs) got even better. Health Savings Accounts have become increasingly popular, primarily because they allow individuals to use pre-tax dollars to pay for qualified medical expenses and they do not have a “use it or lose it” provision like Flexible Spending Accounts (FSA). You can actually carry over unused funds from year to year. In Maryland, small group HSA offerings are very competitively priced, which has enhanced their popularity greatly.
New provisions of the Tax Relief and Health Care Act of 2006, effective January 1, 2007, improved many of the benefits available through Health Savings Accounts. Below are some of the most applicable and important highlights, which you may find a bit arcane or down right confusing. No problem. FranklinMorris is ready and able to assist you in navigating the new provisions and making a decision on how best to use an HSA to stretch your health care dollars.
- HSAs are no longer limited to the lesser of the deductible or the
statutory limit. Now participants can contribute yearly up to $2,850 for a
single enrollee and $5,850 for all others. These limits apply regardless
of when the HSA is established during the year. So, even a
November/December start-up plan allows participants to contribute the full
statutory amount on a deductible basis. This is particularly beneficial
for those participants who are high utilizers of health care and have
additional needs beyond the deductible to cover other expenses such as
orthodontia or separate out-of-network plan deductibles.
- Enrollees establishing an HSA mid-year are allowed the full contribution
limits as highlighted above. Previously, mid-year enrollees’ contribution
amounts were prorated based on the month they enrolled. However, if the
participant enrolls mid-year and contributes beyond the prorated amount,
he/she must stay enrolled in the plan through the following calendar year.
For example, if a participant enrolls on June 1, 2007, and contributes the
statutory maximum, then he/she would be required to remain enrolled
through December 31, 2008.
- HSAs now allow a one-time tax-free rollover of IRA funds into HSAs.
Previously, this was not an option. This now allows participants to
“prefund” their account while potential employer contributions accrue per
pay throughout the course of the year (per pay pre-tax contributions are
only available to W-2 or non-owner, non-partner employees – same as
Section 125 Medical Flex Spending Account regulations). The one-time
rollover limit is the statutory limit of $2,850 or $5,850, and the
transfer must be made from the trustee of the IRA funds to the trustee of
the HSA funds.
- HSAs now allow one-time tax-free transfers of FSA funds. These are
limited to the lesser of the FSA balance as of September 21, 2006, or the
date the transfer is made. These transfers are not counted against the
statutory limits but, if made, require participants to remain in an HSA
for 13 months.
- The treasury is now required to publish HSA statutory limits for the
following year no later than June 1 of the current year. This is a big
advantage for participants because, previously, the limits were published
as late as December for January 1 implementation.