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[*IMPORTANT
NOTE: An HSA is a 2
Component Plan and the above Live Application Link ONLY allows you to set
up the Savings Account component, not the HDHP (High Deductible Health
Plan); therefore, after setting up your HSA Savings Account please return
to our website and inquire of us about also setting up your HDHP (the
actual insurance component). We have several qualified HSA Plans for you
to chose from]
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The health care bill may make High
Deductible Health Plans paired with HSAs more attractive than ever to the
self-employed and small businesses. But it does effect HSA holders in
three significant ways.
Starting January 1, 2011
- You may no longer use your HSA to purchase
over-the-counter medications without a doctor’s prescription. You do not need
a doctor’s prescription for diabetic supplies.
- The legislation increases
the penalty tax on distributions from HSAs that are not used for qualified
medical expenses to 20 percent from 10 percent.
Starting January 2014
As the law stands now, the upper limit on HSA-compatible
high-deductible health plans will decrease to $2000 for individuals and $4000
for families. It is unclear how this change will affect HSA contribution limits.
UPDATE - Click Here for > Impact on HSAs Under the PPACA
- Health Care Reform
Click Here for the Details to All Forms of Health
Insurance
Based Upon the
2010 Health Care Reforms - "Obamacare"
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 Minimum & Maximum Deductibles are shown in the chart below.
-
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,
although this is rapidly changing; therefore, check with your State for
its status on such matters:
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
and last updated 05-28-2009)
[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 and Family - see chart below
(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 Minimum & Maximum Deductibles (indexed annually for
inflation) & Annually Indexed > Out-of-Pocket Limits
& Allowable SAVINGS ACCOUNT Catch Up Contributions for Americans Age 55+
The new 2012
dollar limits are $3,100 for individuals and $6,250 for families as the
above chart shows. The $1,000 catch-up stays the same. IRS Rev Proc
2011-32
[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)]
-
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.
What about
using funds within an IRA (Individual Retirement Account) to fund an HSA?
Yes, this can be done -
click here for a detailed explanation.
______
Disclaimer: The material discussed
herein
is meant for general illustration or informational purposes only and is
not to be construed as investment 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 contained herein should be relied upon only when
coordinated with individual professional advice. We are not licensed for
and therefore do not provide tax or legal advice.
About
the Author: Paul M.
League, QFP, CFP® is the Founding Principal of both League Financial & Insurance
Services (www.LeagueFinancial.com) & League Financial Services (www.LeagueFS.com),
which are privately held companies
located in Palm Desert, CA.
Paul and his companies specialize in assisting clients to
create, expand & preserve assets. Contact Information: Paul M. League, QFP, CFP®, P.O. Box
11800, Palm Desert, CA 92255-1800 · 800.482.5347 ·
Info@LeagueFinancial.com.
©Paul M. League. All Rights Reserved.
--------
IMPORTANT HSA TAX LINKS & LEGAL CLARIFICATIONS/UPDATES
Using an
IRA to Fund an HDHP - HSA
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:
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.
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