Guest Column
By Amy Gallagher
In the three years since health savings accounts (HSAs) were first offered, national enrollment in the plans has jumped from 500,000 to more than 3 million. Despite this steady momentum, however, the majority of Americans remain cautious about selecting these new plans – and employers have been slow to offer them.
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With Congress’ passage of the Tax Relief and Health Care Act of 2006. on Dec. 9, several important tax provisions specific to HSAs should broaden their appeal.
Following are seven worth summarizing:
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The biggest HSA improvement addresses existing limits on maximum contributions. Until now, the maximum contribution an individual could make annually was the lesser of either the individual’s plan deductible or the statutory maximum contribution for single or family coverage (whichever was applicable).
Effective Jan. 1, contributions no longer will be limited by the plan deductible. Instead, individuals can contribute up to the 2007 statutory maximum of $2,850 for individuals and $5,650 for a family.
Since annual deductibles are often far lower than the statutory maximum, this change will allow employees more opportunity to cover current medical expenses and have additional savings to use toward future health care costs.
Health savings accounts were originally designed around “calendar-year deductibles” and “pro-rated calendar-year contribution limits.” For example, if an employer renewed medical coverage in June, its employees were subject to the entire calendar-year deductible but could only contribute a pro-rated amount based on the number of months remaining in the year. This situation often created a “gap” in funding the account to offset the deductible.
For tax years beginning in 2007, the new law repeals this requirement of limiting HSA contributions based on months of eligibility, so long as certain conditions are met. The new law also repeals the limitation on catch-up contributions for employees who are or will be age 55 before the end of the year, so that catch-up amounts will no longer be pro-rated.
Previously, individuals could not transfer funds from an IRA to an HSA. Under the new law, a one-time, tax-free transfer is allowed, so long as the funds transferred do not exceed the maximum statutory limit.
One of the biggest obstacles to offering an HSA has been that employees enrolled in flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs) were ineligible to enroll in an HSA. Starting Jan. 1, a one-time rollover of FSA/HRA balances to employees will be allowed, within certain guidelines, for those employers who want to offer HSAs in place of FSAs or HRAs. Because these are considered one-time rollovers, the amounts added to the HSA funds will not count toward the annual contribution limits.
Many employers offer grace periods during which they preclude employees enrolled in FSAs from also enrolling in an HSA. Now, an individual with a zero balance in an FSA is not disqualified from establishing an HSA during the grace period. This new provision, coupled with the new full-contribution provision, makes it much easier for the employer to offer an HSA.
Under the current law, employers subject to the Comparability Rule must contribute the same amount or same percentage to the deductible for both highly compensated and non-highly compensated employees. With the new legislation, employers not offering a Section 125 Cafeteria Plan are able to contribute more to a non-highly-compensated employee than to a highly compensated one.
Every year, the U.S. Department of the Treasury adjusts the annual deductibles on high-deductible health plans tied to HSAs, according to the cost-of-living adjustments, and it reports these changes in October or November. Under the new act, the Treasury must release the adjustments no later than June 1 of the prior year, to give employers more time to plan changes in their medical offerings and to communicate them.
Overall, these changes are consumer-friendly and employer friendly, and should help HSAs continue to gain momentum.
Amy Gallagher is a senior consultant with Cornerstone Group, in West Warwick, an employee benefits consultancy.
