HOPE (Health Opportunity Patient Empowerment Act of 2006) for HSAs this Holiday Season
The Senate passed the Tax Relief and Health Care Act of 2006 on December 9 which now awaits President Bush’s signature to become law. It offers several eagerly awaited changes to the current law; most of which would become effective 01-01-07.
Employers and employees will benefit from increased HSA contribution limits and the ability to more easily integrate an HSA with an FSA during the grace period. Also, employers who were early adopters of an HRA, only to see the advent of the HSA the following year, may find the ability to transfer HRA balances to an HSA very attractive.
Following is a summary of the primary changes:
• The annual HSA contribution limit is increased to the statutory maximum, regardless of the deductible under the HDHP policy. In 2007, this is $2,850 for individual coverage and $5,650 for family coverage. Those 55 and older in 2007 can still add an additional $800.
• The annual HSA contribution limit is now available to eligible individuals who establish an HSA at any time during the year. Previously, the limit was prorated based on the number of complete months of HDHP coverage during the calendar year.
• An individual may make a one-time, irrevocable direct trustee-to-trustee transfer from an Individual Retirement Account (IRA) to an HSA, limited to certain dollar amounts.
• An employer may allow employees to make a one-time election to transfer a Health FSA or HRA balance directly into an HSA.
• An employee who is participating in a Health FSA with a grace period can now establish an HSA prior to the end of the grace period if the FSA balance is zero.
• An employee with a balance in a Health FSA with a grace period can instruct the employer to transfer the Health FSA balance to an HSA.
Other changes modify the cost-of-living adjustment, direct trustee-to-trustee transfers, and tax on failure to maintain High Deductible Health Plan status.
For more details, please contact us at info@unitybenefitservices.com.
2007 HSA Limits Announced
[Rev. Proc. 2006-53 (Nov. 9, 2006)]
For a copy: http://www.irs.ustreas.gov/pub/irs-drop/rp-06-53.pdf
The IRS has released the 2007 cost-of-living adjustments to various limits for health savings accounts (HSAs), the tax credit for certain qualified retirement plan contributions, qualified transportation benefits, and adoption assistance programs, among other benefits.
Highlights include the following:
HSAs. The 2007 HSA contribution limits and high-deductible health plan (HDHP) requirements (under Code Section 223) will be:
What’s new with Health Savings Accounts (HSAs)?
Health Savings Accounts were introduced by Congress in 2003. These accounts are for the purpose of setting aside money for medical expenses; allowable contributions to the accounts are tax-deductible and withdrawals to pay for qualified medical expenses are also tax-free.
These plans must have a high deductible, as set out by Congress. Compared to traditional plans, the premiums are generally lower and the deductibles considerably higher. (Two-thirds of employers offering these plans make a contribution to the HSA for the employees, to help offset the higher deductibles, per the Kaiser Family Foundation.)
Two attractive features are: Anyone can open an HSA account (if it is connected to the required high-deductible plan) and the account is portable (meaning you keep it as you move from job to job).
According to Kiplinger’s (October 2006): “In 2004, fewer than 10% of midsize and larger firms offered a high-deductible option…. In 2007, more than 60% will.” One such option is the Health Reimbursement Arrangement (HRA), but another option – and the one discussed here – is the Health Savings Account (HSA).
In late September, Representative Cantor of Virginia introduced the Health Opportunity Patient Empowerment Act of 2006. If approved when Congress reconvenes this fall, the act’s primary changes to HSAs, generally effective after 12-31-06, would be the following:
Greater Flexibility for Flexible Benefits
H.R. 4511, the Flex Health Savings Accounts Act of 2005, introduced in the House of Representatives on December 13 by Chief Deputy Majority Whip Eric Cantor provides for much greater flexibility in the use of High Deductible Health Plans (HDHP) with other types of Consumer Driven Health Plans, such as Health Reimbursement Arrangements (HRA) and Flexible Spending Accounts (FSA). If enacted, this bill provides for HSA funding of the statutory limit ($2,700 for single; $5,450 for family in 2006), regardless of the HDHP deductible. FSAs and/or HRAs could also be used in conjunction with the HDHP and HSA as long as total coverage under all plans did not exceed the maximum annual out-of-pocket limit ($5,250 for single; $10,500 for family in 2006) under the policy. In addition, any plans which limit covered expenses to only permitted coverage items such as dental, vision, and preventive care would not count toward this limit.
For all the details, click here to access this bill.
2006 HSA Maximums
On October 28, 2005, the Treasury Department and IRS issued the following HSA maximums for 2006:
Annual Contribution: $2,700 self-only; $5,450 family
Catch up Contribution for those age 55+: $700
Annual HDHP Out-of-pocket Limit: $5,250 self-only; $10,500 family
Minimum HDHP Deductible: $1,050 self-only; $2,100 family
Form W-2 Reporting with Grace - Period.
On September 7, 2005, the IRS issued Notice 2005-61 providing guidance on the reporting requirements for dependent care assistance programs (DCAP) with a grace period. The notice amplifies Notice 89-111 which states that the amount reported in Box 10 of Form W-2 is the actual total cash reimbursement to the employee during the calendar year. If the actual total is not known at the time the Form W-2 is prepared, then a reasonable estimate of the total is used. The employee elective contribution (plus any employer matching) is considered a reasonable estimate for this purpose. Therefore, if an employee elects $5,000 in 2005 and has $500 unused at year end which is still available for reimbursement during the grace period, then the employer reports the estimate of the $5,000 election in 2005. Subsequently, if the employee again elects $5000 for the 2006 calendar year, the $5,00 election amount would again be reported in 2006.
Upcoming Event
On July 12, 2005, Amy E. Roth, CPA will be conducting a continuing professional education seminar entitled, Health Savings Accounts (HSA): The Benefit du Jour On The Cafeteria Plan Menu, for the Knoxville Chapter of the Tennessee Society of CPAs.
The IRS issued new guidance on June 15, 2005, outlining when the adoption of a foreign-born child is considered final for tax purposes. The most significant change was to allow certain adoptions to become final upon entry of a decree by the foreign-sending county as well as action of the home state (if within one of the next two taxable years). The result is to increase the possibility that tax benefits would be available sooner. This is welcome news for employers offering adoption assistance programs under a cafeteria plan, as it makes participation in the plan more viable for employees adopting foreign-born children.
On May 18, 2005, the IRS announced that an employer may now amend its cafeteria plan to reimburse all flexible spending account (FSA) participants for claims incurred up to 2½ months after the close of a plan year. This would provide FSA participants with a grace period of up to 2½ months to spend money leftover in their FSAs at the end of the year on qualified health and dependent care expenses. This is welcome news and should increase health FSA and dependent care participation, as it will lead to a decrease in participant forfeitures.
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