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Health Savings Accounts (HSA) were created Public Law 108-173 and signed into law by President Bush on December 8, 2003. HSAs have changed the way millions meet their healthcare needs since they are designed to help individuals save for qualified medical and retiree health expenses on a tax favorable basis.

To qualify, any adult who is covered by an approved High Deductible Health Plan (HDHP) may establish an HSA. A HDHP will have no other first-dollar coverage. Tax favorable contributions may be made as follows:
 

• An individual or family can make tax deductible contribution to the HSA - even if they do not itemize deductions.

 

• The individual's employer can make contributions that are not taxed either to the employee or the employer.

 

• If an employer has a cafeteria plan, the employee contributions are made on a pre-tax basis.

 
The IRS has just released the contribution limits for 2009:
 

• For individual coverage - the limit has increased to $3,000 - up from $2,900 in 2008.
• For family coverage - the limit has increased to $5,950 - up from $5,800 in 2008.

 
In addition, individuals reaching age 55 by the end of 2008 have an additional "catch-up" contribution of $1,000 - up from $900 in 2008.
 
High Deductible Health Plan Maximums have also increased for 2009:
 

• Individual coverage increased to $5,800 - up from $5,600 in 2008.
• Family coverage increased to $11,600 - up from $11,2 00 in 2008.

 
The minimum deductible for a High Deductible Health Plan has also increased:
 
Individual coverage has increased to $1,150 from $1,100 in 2008.

• Family coverage has increased to $2,300 form $2,200 in 2008.

 
In early June, the IRS issued two notices that provide guidance on the rules for contributions and rollovers into HSAs.

Notice 2008-51 focuses on IRA rollovers to HSAs. A rollover is permitted from a traditional IRA or Roth IRA, but not a Simplified Employee Pension (SEP) or SIMPLE IRA. The IRA rollover amount is counted against an individual's annual HSA contribution limit, including any catch-up provisions.

Generally, you may make a one time IRA rollover to an HSA. In this case, the IRA distribution is tax-free. If an individual wanted to roll over amounts from two IRAs, they must first move the money from one IRA into another and then do a single IRA rollover.
Two rollovers are allowed in a single year if the first rollover occurred during family HDHP coverage.  A second rollover in a subsequent year is permissible. The IRA distribution would then be taxable. The corresponding HSA contribution would be tax deductible. The rollover must be a direct "Trustee to Trustee Transfer."

Notice 2008-52 focuses on how the contributions changed. HSA-eligible employees can make the full year's contribution, up to the allowed amount, as long as they become eligible for the HSA plan by December 1. The full contribution rule also applies to catch-up contributions for those who are age 55 or older during the year.

 Keep in mind, one must continue to have HDHP coverage and not have any non-HDHP coverage. Thus, any individual who opens an HSA in 2008 will have a "testing period" that begins on December 1, 2008 and ends on December 31, 2009. Failure to maintain a HDHP during this testing period makes a portion of the contribution taxable and subject to a 10 percent penalty. Additionally, if an individual makes an excess contribution to a HSA, that contribution is subject to a 6 percent excise tax, unless a withdrawal of the excess contribution is made before the next April 15 "tax day." An individual could be "double taxed" if they make a full contribution, fail to maintain the HDHP during the testing period and receives a distribution for non-eligible expenses. Both the contribution and distribution are subject to both taxation and the 10 percent penalty.

 Individuals should be sure to work with a licensed insurance advisor and seek guidance from their tax advisor before entering into a HDHP arrangement.
 
 

Tanya L. Burns is owner of Tanya L. Burns and Associates, Inc., an independent employee benefits and financial services agency located in Orlando.

        
 
July 2008

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