IMPORTANT
HSA TAX LINKS & LEGAL CLARIFICATIONS/UPDATES
I.
Top Reasons for Owning a HDHP - HSA Now (personal & tax saving advantages)
II. HSAs ~ In A Nutshell
-
You save money on personal taxes since annual contributions to
the Savings Account component of an HSA are tax-deductible
-
You save money on current and future day-to-day medical costs
by using tax-free dollars to meet those expenses, and an insurance company to pay the catastrophic
bills
-
You also save money through lower rates on your health
insurance since an HSA allows you to purchase the health plan component of the
plan using a lower cost, high deductible, while protecting your higher
deductible exposure through the tax-deductible Savings Account component of
the HSA
-
Your unused, Savings Account funds, grow tax-deferred - what
you don't spend you keep year after year (a lot like an Individual Retirement
Account, except that you use it to pay for medical expenses).
HSA Eligibility:
-
You must be or get covered by a qualified High
Deductible Health Plan (HDHP) - the Maximum Deductible in 2008 is:
Family = $5,800 / Single = $2,900.
-
You must not be covered by other health insurance
(exceptions: vision, dental, long term care, disability, life and accident
insurance are okay)
-
You must not be enrolled in Medicare
-
You must not be claimed as a dependent on another's tax
return
(Note: The health accounts also are shielded from
state income taxes in most of the country, but seven states have declined to
provide an exemption: Alabama, California, Maine, Massachusetts, New Jersey,
Pennsylvania and Wisconsin).
HSAs ~ The Article:
The Health Savings Account (HSA) – The Dawning of Expanded Health Care
By Paul M. League, QFP, CFP®
Originally Drafted - January 2004
(Last updated 01/22/2008)
[See the bottom of this page for additional Treasury and
other updates
on HSAs- Click Here - UPDATES]
President George W. Bush signed into law the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 on December 8, 2003. Tucked
along with it comes the January 2004 enactment of the Health Savings Account
(“HSA”), created for persons prior to reaching Medicare age, typically age 65,
and created to help one save to meet medical and retiree health expenses on a
tax-free basis.
According to a statement by
Treasury Secretary Snow on 12/9/03:
“An important provision in the
bill greatly expands the former Medical Savings Accounts into new and
innovative Health Savings Accounts. HSAs provide an important and welcome
option for many Americans to fund their health care expenses. Treasury is
committed to ensuring that taxpayers get the full benefit of HSAs as quickly
as possible”.
What is an HSA?
Like its precursor MSA, or
Medical Savings Account, the HSA is a two-component health plan consisting of
a tax-deductible, high deductible catastrophic health insurance plan, and a
tax-free claims expense reimbursement and tax-deferred savings plan.
Reimbursements from the
savings plan account, for those expenses deemed eligible (as defined under a more
liberal and far broader federal definition) are received 100% tax free, while
all other withdrawals are taxable as ordinary income with an added penalty
when taken prior to age of 65. Simply stated, the HSA is just the permanent
expansion of the former MSA, but with several very meaningful enhancements.
Why an HSA, or Health Savings
Account?
The primary reason is
affordability, and the secondary open choice in doctors and hospitals. Many
vendors of the precursor MSA required insureds to use only network-listed
doctors and hospitals, making them much like the less desirable and
restrictive HMO (Health Maintenance Organizations with their Staff Models or IPAs – Independent Physician Associations), or the slightly less restrictive
PPO (Preferred Provider Organizations). The reason they did so is because
such networks provide Insurers with pricing discounts that “may” be passed
onto the consumer, either by increased benefits, lower policy premiums, or
both.
Like these former MSA models
there will also be versions of the new HSA offering discounted network-linked
models; however, a significant advantage of an HSA that’s, “made of the right
stuff”, is one that places no such restrictions on an insureds freedom to seek
out and negotiate services from any doctor or any hospital of their choosing.
However, for this to work out properly, there needs to be an incentive to cost
control. Therefore, on the cost side of the equation, only when consumers
have a good portion of their assets at stake will they be compelled to shop
for and receive more cost effective and reasonably priced health care.
This will mean higher first dollar deductibles, which conveniently will cause the
consumer to think before spending, thereby helping to dampen spending and the
associated higher costs. After all, who really needs to pay the high costs of
medical insurance for an occasional, and relatively low cost check up, cold or
flu? What is really needed by all is coverage that handles the more costly,
catastrophic health care costs associated with surgery, hospitalization and
chronic health conditions.
Government and health
Insurers, have proven to be largely ineffective in controlling long-term
health care costs, until perhaps now. Enticing consumers into zero, or very
low co-pay HMOs or low deductible PPOs, has only wrongly reinforced the
consumer misconception of the health care Medical Insurance ID Card and plan
as equal to a “credit card”…but with one slight of hand; namely, that it is a
one way proposition supported by, and paid for by, some fat-cat Insurer paying
for all consumer excesses. Little did consumers know, until perhaps
having passed through the last decade where premiums & health care costs have
again reached all time highs, that all of this spending has come back with a
fury to bite them in the form of reduced benefits, more cost shifting by the
Insurers, and increased out of pocket expenses at the premium gas pump!
Indeed, the
piper has returned and is seeking inflation-adjusted payment. With cost
increases once again averaging in excess of 12-20% annually, under most any
health plan model, one can easily see the immediate need for a timely,
longer-term solution and alternative to the present
highway-to-ever-increasing-health-care-costs system.
HSAs to the rescue!
MSAs, with limited carriers
who actually understood the model, have proven stable and able to control long
term costs more effectively then their HMO, PPO, EPO, or other such
cost-containment model counterparts. One such MSA carrier reports an industry
breaking 80% policyholder persistency, with rate renewals way under their US
counterparts, and they (and the few others like them), are ready to go with
enhanced, and now permanently expanded, new HSA models.
The HSA Enhancements
With the permanent expansion
of MSAs into HSAs, come a number of key improvements and advantages over all
prior and parallel existing models, of all types, for example:
-
First, and
foremost, now anyone can have an HSA.
-
Premiums,
for the catastrophic health insurance component, are 100% tax deductible to
those who are self-employed, and to those who are 2% or greater owners of an
S-Corp or Partnership (this is under consideration to be
expanded to cover all persons in 2005-06).
-
The above do NOT have to itemize
to take what is for them, an "above the line", tax deduction.
-
Personal
contributions into the Health Savings Account component are 100% tax
deductible for all individuals, whether or not they are self-employed,
Partners or S-Corporation owners (the only ones who were eligible under the
prior MSA models), and such deposits accumulate tax-deferred.
-
HSA savings
account contributions may be made each year up to 100% of the policy
deductible. So, as of 2004 onward the highest available family
deductible can be fully deducted, unlike the precursor MSA, where
a single person could previously only tax deduct up to 65% of their
deductible, or 75% for parties of two or more (Family).
-
Individuals
ages 55-65 may make additional "catch-up" contributions of up to $500 in
2004, increasing to $1,000 annually in 2009 and thereafter. A married
couple can make two catch-up contributions as long as both spouses are at
least age 55.
-
New lower
deductible limits have been introduced for Single $1,000, and Family of
$2,000 (these newer lower deductible plans will cost more, and also do not
provide the needed tax savings to make the HSA pricing equation work well,
although they will help to interest virgin newcomers into looking into HSAs).
-
New
deductible limits will be tied to the Consumer Price Index (CPI) starting
January 1, 2004 onward.
(Note: The health accounts also
are shielded from state income taxes in most of the country, but seven states
have declined to provide an exemption: Alabama, California, Maine,
Massachusetts, New Jersey, Pennsylvania and Wisconsin).
Allowable Deductibles (indexed annually for inflation):
| |
2007 |
2007 |
2008 |
2008 |
| |
Single |
Family |
Single |
Family |
|
Maximum |
$2,850 |
$5,650 |
$2,900 |
$5,800 |
Qualified High Deductible
Health Plan (HDHP)-
Maximum Out of Pocket Limits
(deductibles, co-payments and
other expenses - exclusive of plan premiums)
Annually Indexed >
Out-of-Pocket Limits
| 2007 |
2008 |
| Single = $5,500 |
$5,800 |
| 2-Party = $11,000 |
$11,200 |
Allowable SAVINGS ACCOUNT Catch Up Contributions for
Americans Age 55+
[Both spouses can contribute the following
additional funds if age 55+, on a pro-rated basis beginning from the month of
the year in which they turn age 55, but not past the point of enrollment in
EITHER Medicare Part A or B (remember most persons are automatically enrolled
in Part A if they are enrolled in Social Security)]
| 2007 |
$800 |
| 2008 |
$900 |
| 2009 and onward |
$1000 |
-
New out of
pocket maximums (includes deductibles and all co-pays and/or co-insurance
expenses, and *indexed
annually for inflation -see Maximum Out of Pocket Limits chart above).
-
The broader
federal definition of “eligible medical expense” remains and therefore
includes, and allows for tax free reimbursements on such often non-covered
or substantially reduced items of traditional health plan models of any
given State, as: Dental, Vision, Chiropractic, Mental, Long Term Care
services and insurance premiums, COBRA, etc.
-
Preventive
care services, as well as coverage for accidents, disability, dental care,
vision care, and long-term care are not subject to the deductible, so they
can be paid as "first dollar benefits", and reimbursed 100% tax free from
the savings component of the HSA.
-
The penalty
for taking withdrawals for other then tax free reimbursement of eligible
medical expenses from the Savings component is reduced from the MSA penalty
of 15% down to only 10% for the HSA.
-
HSA
contributions may be made by individuals, family members and employers and
are tax deductible, even if the account beneficiary does not itemize.
Employer contributions are made on a pre-tax basis and are not taxable to
the employee. Any savings account contributions by
the employer are not subject to payroll tax (therefore not subject to State
or Federal withholding, or Medicare or FICA).
-
Reimbursements
from the HSA Savings Account component, for eligible medical expenses,
remain tax free, and also do not require that one exceed 7.5% of their AGI
(Adjusted Gross Income) threshold to qualify (IRC 213(a)).
-
Employees
can use their Section 125 Cafeteria Plan funds to pay for their HSA
insurance premiums, thereby using pre-tax Cafeteria Plan dollars over
after-tax dollars. Generally, employees would make payments to the
savings component of the HSA with non-Section 125 funds.
-
HSAs are
fully portable by employees.
-
HSA savings
may also be used to pay for Medicare premiums, or the cost of a Medicare
HMO, but can not be used to buy supplemental insurance that is designed to
pick up the gaps in Medicare, better known as Medi-Gap policies.
-
Upon death,
HSA ownership may transfer to the spouse on a tax-free basis.
While many will be attracted
by the new lower deductibles, once priced out, they will soon realize that the
higher deductibles continue to afford the “better buy”. Why? As with the
prior MSA, the HSA finds its additional sizzle within the tax deduction side of the
equation. With the higher deductible, and higher out of pocket plan maximums
(i.e. a combination of deductibles along with all insured co-insurance &
co-pay liabilities),
and especially for those in higher tax brackets in need of tax deductions, the
result can be the government subsidizing up to 100% of the health insurance
premium component of your plan. The way this occurs is one may receive more
in direct tax deductions, again depending on ones tax bracket, then the cost
of the high deductible, high out of pocket, catastrophic health insurance
itself that forms the foundation of the HSA. Under such scenarios, it
may be
preferable, and much cheaper, to simply run all health expenses through a tax
deductible HSA savings account, where reimbursements are also received
tax-free.
For Group HSAs, many Insurers
will continue only selling “List Billed” programs, so that they can avoid the
guarantee issue requirements of many State small group insurance laws (like
California's AB
1672). Employees, whose employers set up and fund an HSA, can’t deduct the health insurance premium
(though they could move it to pre-tax using a Cafeteria Section 125 Plan), but can deduct the savings
account (that money that is earmarked for 100% funding of their HSA plan
deductible) to whatever extent they share in its funding. Many employees may
even prefer that the employer and/or themselves fund the savings component of
the HSA with “after-tax” dollars (i.e. neither will declare a tax deduction),
so as to not have any of that money "locked up" by the pre-65 penalties, regardless of who contributed
what. Certainly, owners and key personnel will want the full advantages of
tax deductibility and deferred savings, though rank and file employees may
fair better buying their own, private, HSA, with or without employer support.
Remember too, that HSAs are fully portable, yet another advantage to owning
one.
HRAs, or Health Reimbursement
Arrangements, and Cafeteria Section 125 Flexible Spending Accounts (FSAs) both
with reversion of unused medical expense dollars back to the Employer, will
now become increasingly challenged, and, in the case of HRAs, less
undesirable. Why? Well, employees will see the advantages in HSAs over HRAs
where they maintain control of their savings account dollars, and where they
can also access such “assets” for other then medical expenses (albeit at a
penalty prior to age 65, only when withdrawn for other then eligible medical
expenses), rather then having them “sacrificed” or reverted back to their
employer when not fully used up for eligible medical expenses. No more
lack of portability or of the
“Use It or Loose It” forfeitures problems.
The Health Savings Account is
indeed a welcome expansion of health care, a timely solution that will bring
forth years of creative options for American health care consumers. No
longer a trial program, like its precursor MSA, many Insurers will finally
make the investment in both infrastructure and plan design, ramping up with a
myriad of meaningful consumer offerings that will increase competition and
choice for all. Will the HSA, in addition to providing important increased
health care options, also end up better controlling costs? This remains to be
seen, but the answer lies more likely in the consumers understanding, embrace,
and utilization of the core features & characteristics that position the HSA
with the ability to be distinctly better than most any other health care model
heretofore available.
2008 Update: Top Reasons for Owning a HDHP - HSA Now (personal & tax
saving advantages)
______
Disclaimer Notes: The material discussed is meant for general illustration or
informational purposes only and is not to be construed as investment or tax
advice. Although the information has been gathered from sources believed to be
reliable, it is not guaranteed. Please note that individual situations can
vary. Therefore, the information should be relied upon only when coordinated
with individual professional advice. We do not provide tax or legal advice]. ©Paul
M. League. All Rights Reserved.
Author:
Paul M. League, QFP, CFP® is the principal of League Financial & Insurance
Services / LeagueFinancial.com, and Chairperson (2003-2005) of the INTERNATIONAL ASSOCIATION
of QUALIFIED FINANCIAL PLANNERS (www.IAQFP.org).
Paul has specialized in assisting clients to create, expand and preserve
assets through
individual and group financial programs for over 25 years. He can be reached at
P.O. Box 11800, Palm Desert, CA 92255-1800, phone 1.800.482.5347;
www.LeagueFinancial.com; E-mail:
Paul@LeagueFinancial.com.
Hyperlink
Disclaimer
Regarding Off-Site - Live Internet Linked Pages
The
information being provided is strictly as a courtesy.
When you link to any of the websites provided herewith, you are leaving
this site. Paul M. League, League
Financial & Insurance Services, LeagueFinancial.com and Royal Alliance Associates, Inc. make no
representation as to the completeness or accuracy of information that is
provided at these sites. Nor are
the companies liable for any direct or indirect technical or system issues or
any consequences arising out of your access to or your use of third-party
technologies, sites, information and programs made available through this site.
You
are now leaving the website of LeagueFinancial.com and you assume total
responsibility and risk for your use of the site you are linking to.
IMPORTANT
HSA TAX LINKS & LEGAL CLARIFICATIONS/UPDATES
Top Reasons for Owning a HDHP - HSA Now (personal & tax saving advantages)
HSA
Tax Filing Form
IRS
publication 969 - the HSA Brochure
UPDATES:
Legislative Updates:
IRS
Issues HSA Guidance on Multiple Issues - June 25, 2008
On Wednesday, June 25, 2008, the IRS
published Notice 2008-59, which clarifies many of the rules for Health Savings
Accounts (HSAs). This long-awaited guidance focuses on major aspects of HSA
administration, including eligibility, high-deductible health plans (HDHPs),
contributions, distributions and prohibited transactions.
The IRS organized the 28-page Notice, which
takes immediate effect, in a question-and-answer format. Brief highlights of
the Notice include:
-
A limited-purpose HRA can reimburse health
plan premiums and still be compatible with an HSA.
-
An employee's use of free health care or
health care at charges below fair market value from an employer's on-site
clinic do not affect HSA eligibility as long as the clinic does not provide
significant benefits in the nature of medical care.
-
An employee with family HDHP coverage can
contribute the annual HSA family amount ($5,800 in 2008) even if one or more
of the employees' dependents has non-HDHP coverage. Of course, the employee
cannot be covered under the non-HDHP plan.
-
An HSA offering a debit card may restrict
the debit card's use to medical expenses as long as funds are readily
available for non-medical expenses by other means.
-
HSA loans and lines of credit are
prohibited.
See IRS Notices: 2008-59 and recently
issued guidance on HSA rollovers, Notices 2008-51 and 2008-52
for more information. Further, on
Tuesday, June 24, 2008, the IRS published Announcement
2008-63, which increases the mileage rates for the remainder of 2008 for
Health FSA/HRA/HSA reimbursements: $.19 to $.27 per mile. The mileage changes
take effect on Tuesday, July 1, 2008. You can find a copy of Notice 2008-59
at:
www.treas.gov/press/releases/reports/notice200859.pdf,
and Announcement 2008-63 at
www.irs.gov/pub/irs-drop/a-08-63.pdf.
________
Health Opportunity Patient Empowerment Act of 2006 - HP-209
President Bush Signs Bill to Make Health Care More Affordable &
Accessible
Washington, DC--December 20, 2006--President George W. Bush signed the
Health Opportunity Patient Empowerment Act
of 2006 today, enhancing
Americans' access to tax-advantaged health care savings. The law, part of the
Tax Relief and Health Care Act of 2006, provides new opportunities for health
savings account (HSA) participants' to build their funds.
"Health savings accounts are improving the way Americans obtain
the care they need. This bill makes HSAs more flexible and makes it easier for
participants to put money aside for their personal health care," said Treasury
Assistant Secretary for Tax Policy Eric Solomon.
HSA provisions of the Act include:
Allow rollovers from health FSAs and HRAs into HSAs through
2011. Employers can transfer funds from Flexible Spending Arrangements (FSAs)
or Health Reimbursement Arrangements (HRAs) to an HSA for employees switching
to coverage under an HSA-compatible health plan. The amounts rolled over to
HSAs from FSAs or HRAs are over and above the amounts allowed as annual
contributions. The maximum contribution is the balance in the FSA or HRA as of
September 21, 2006, or if less, the balance as of the date of the transfer.
The provision is limited to one distribution with respect to each health FSA
or HRA of the individual. If an individual does not remain an eligible
individual for the 12 months following the month of the contribution, the
transferred amount is included in income and subject to a 10 percent
additional tax.
Increase in annual HSA contribution. Previously, the maximum HSA
contribution was the lesser of the deductible of the individual's HSA-eligible
plan or a statutory maximum. The new rules make the limit the statutory
maximum contribution, regardless of the individual's deductible. For 2007, the
maximum contribution for an eligible individual with self-only coverage is
$2,850, and the maximum contribution for an eligible individual with family
coverage is $5,650. These limits are indexed for inflation.
Full HSA contribution regardless of month individual becomes eligible.
Normally, the HSA contribution is pro rated based on the number of months that
an individual during the year a person was an eligible individual. The new
provisions provide an exception to this rule that will allow individuals who
become covered under an HSA-eligible plan in a month other than January to
make the maximum HSA contribution for the year based on their coverage in the
last month of the year. This eliminates a common barrier to switching to HSA-eligible
coverage. If an individual does not stay in the HSA-eligible plan 12 months
following the last month of the year of the first year of eligibility, the
amount which could not have been contributed except for this provision will be
included in income and subject to a 10 percent additional tax.
One-time transfer from IRAs to HSAs. The new rules allow for a
one-time contribution to an HSA of amounts distributed from an Individual
Retirement Arrangement (IRA). The contribution must be made in a direct
trustee-to-trustee transfer. The IRA transfer will not be included in income
or subject to the early withdrawal additional tax. The transfer is limited to
the maximum HSA contribution for the year, and the amount contributed is not
allowed as a deduction. Generally, only one transfer may be made during the
lifetime of an individual. If an individual electing the one-time transfer
does not remain an eligible individual for the 12 months following the month
of the contribution, the transferred amount is included in income and subject
to a 10 percent additional tax.
Certain FSA coverage treated as disregarded coverage. Under
previous law, if an FSA had a grace period following the end of the plan year
allowing participants to incur additional reimbursable expenses, participants
were treated as having disqualifying coverage, reducing their HSA contribution
for that year, even though they had switched to HSA-eligible coverage at the
first of the year. The new rules treat certain FSA coverage during a grace
period as disregarded coverage, eliminating any resulting reduction in the HSA
contribution for the year. First, the coverage is disregarded if the balance
in the health FSA at the end of the plan year is zero. Second, the coverage is
disregarded if the year-end balance is transferred directly to an HSA fom the
FSA, as noted above.
Earlier indexing of cost of living adjustments. Previously,
indexing was based on a 12-month period ending on August 31. The new rules
change the base period to the 12-month period ending on March 31 and require
that adjusted amounts for a year be published by June 1 of the preceding year.
This change will provide employers and health plans with more time to design
qualifying HSA-eligible plans and individuals with more time to make decisions
about their health care for the next year.
Allow greater employer contributions for lower-paid employees.
Previously, employer contributions under the comparability rules had to be the
same amount or percentage of the deductible for all employees with the same
category of coverage. Consequently, employers could not contribute higher
amounts to lower-paid employees. The new rules provide an exception to the
comparability rules allowing employers to contribute more to the HSAs of
non-highly compensated individuals (for this purpose, the definition of
"highly compensated employee" is based on same definition used for qualified
retirement plans).
Tax Relief and Health
Care Act of 2006 - the 109th Congress Expands Health Savings Accounts in Final
Days (Pending President Bush's Signature into Law)
Lake
Geneva, WI -- December 9, 2006 -- The U.S. Congress gave final approval on
Friday 12/08/06 to H.R. 6111, the "Tax Relief and Health Care Act of 2006"
which included provisions expanding Health Savings Accounts (HSAs). The
legislation incorporates provisions from H.R. 6134, the "Health Opportunity
Patient Empowerment Act of 2006", introduced by Reps. Eric Cantor (R-VA) and
Paul Ryan (R-WI), and approved on September 27, 2006 by the House Ways and
Means Committee. "HSAs are still relatively new, but we are already seeing
them quickly grow in popularity in the early stages of their existence," said
Ways and Means Chairman Bill Thomas (R-CA) on September 27, 2006. "The
adjustments in this bill will make HSAs more attractive as Americans consider
their health insurance options." SEE ABOVE FOR FINAL ENACTMENT OF
NEW HSA PROVISIONS.
IRS Issues Final HSA
Comparability Rules - 9/2006
The US Department of the Treasury and the Internal Revenue Service recently
issued final regulations governing Health Savings Account (HSA) comparability
rules. If an employer contributes to an employee’s HSA, comparability rules
require the employer to make comparable contributions to all applicable
employees. Contributions are considered comparable if the contributions are
the same amount or the same percentage of the deductible under the high
deductible health plan.
The most noteworthy portion of the regulations is the clarification that
contributions made through a Section 125 cafeteria plan are not subject to the
comparability rules. Contributions are considered made through a cafeteria
plan if under the written cafeteria plan employees have the right to elect to
receive cash or other taxable benefits in lieu of all or a portion of an HSA
contribution, regardless of whether an employee actually elects to contribute
any amount to the HSA by salary reduction. HSA contributions made through a
cafeteria plan are subject to non-discrimination testing requirements
under the cafeteria plan.
Other highlights include:
• For purposes of comparability testing, there are two categories of coverage
- self-only and family coverage. Additionally, the following subcategories of
family coverage may be treated as separate categories:
Self + one
Self + two
Self + three or more
• A category providing coverage for the same number of individuals is treated
a single category.
• Full-time employees, part-time employees and former employees (excluding
those on COBRA) are treated as separate groups for purposes of comparability
testing.
• HSA contributions made on behalf of sole-proprietors, self-employed
individuals, independent contractors and partners in a partnership are not
subject to the comparability rules.
• HSA contributions made by the employer for employees covered by a collective
bargaining agreement may be excluded from the comparability rules (if benefits
are the subject of good faith bargaining).
• An employer must take “reasonable actions” to locate missing participants
for whom comparable contributions are due. “Reasonable actions” includes
certified mail, IRS’ Letter Forwarding Program and/or the Social Security
Administration’s Letter Forwarding Service.
IRS Clarifies HSA Grace Periods and Cafeteria FSA Grace Periods
Connections- 11/22/05
The IRS provided welcome relief and clarification this week
related to the intersection between Health Savings Accounts (HSAs) and Health
Flexible Spending Arrangement (Health FSA) grace periods. This is good and
timely news for employers taking a first-time dip in the pool of
Consumer-Driven Health Care (CDHC) next year.
IRS Notice 2005-86,
released on Nov. 22, 2005 actually offers guidance on two important issues:
-
Options available to employers who want to move from a Health FSA with a
grace period to an HSA.
-
Clarification on several questions relating to grace periods.
HSA-Health FSA Interaction
When
IRS Notice 2005-42 modified the
“use-it-or-lose-it” rule, it provided Health FSA plans the ability to carry
over unused account balances for a grace period of up to two months and 15
days. This created a problem for employers who wanted to offer an HSA and a
Health FSA grace period at the same time.
The problem is that a general-purpose Health FSA constitutes
impermissible coverage that prohibits an individual from participating in an
HSA. In Tuesday’s Notice, the IRS identified three arrangements (one available
for a transitional time only) in which an individual can participate in both
an HSA and a Health FSA grace period:
- The
employer may amend its Health FSA to make it a limited-purpose FSA.
- The
employer may amend its Health FSA to make it a post-deductible FSA.
- For
plan years ending on June 4, 2006 or earlier, employers may have a
general-deductible FSA and an HSA if:
- The
individual is covered under a High Deductible Health Plan (HDHP) and does
not have any other impermissible health coverage; and
- The
individual has either a zero-balance on his/her Health FSA account or the
employer amends the Health FSA to make the grace period unavailable for
individuals who elect HDHP coverage.
If these rules are not applied, an individual who has
coverage in a general-purpose Health FSA that offers a grace period will not
be eligible to participate in an HSA until the first day of the month
following the date that the grace period ends (e.g., for calendar-year plans
extending the maximum 2½-month grace period: April 1).
Grace Period Clarifications
The IRS also confirmed its position on other issues related
to the grace period. First, a grace period must be offered to all participants
(including those on COBRA) who were covered by the Health FSA on the last day
of the plan year. Second, an employee who terminates employment during a grace
period is still eligible for the full amount of time of the grace period.
Third, an employer may offer a grace period for some Cafeteria Plan benefit
options (e.g., a Health FSA), but not others (e.g., a Dependent Care FSA).
Finally, the maximum grace period ends on the 15 th day of the third calendar
month after the month in which the plan year ends.
(0507241A/122606/012208/062508)
