Dr. HSA

Guest Columnist, Roy Ramthun

Former Economic Advisor to President Bush

IRS Releases Plethora of HSA Guidance

September 2008 - Vol. 16

The Internal Revenue Service (IRS) was busy this summer, issuing three new pieces of guidance and one proposed regulation regarding Health Savings Accounts (HSAs).  The releases clarified some long-standing questions as well as the remaining provisions of the Tax Relief and Health Care Act of 2006.  As a result, virtually all the expected guidance on HSAs is now available.

Guidance on IRA Rollovers
The 2006 Act allowed one-time rollovers of funds from an IRA to an HSA.  The amount rolled over applies towards meeting the annual HSA contribution limit.  On June 4, the IRS released Notice 2008-51, providing guidance for these rollovers. 

This guidance provided two pieces of unexpected good news.  First, individuals age 55 or older can roll over enough funds to cover their catch-up contribution as well as there standard contribution.  Second, individuals can rollover funds from not only a traditional IRA but also from a Roth IRA, a Simplified Employee Pension (SEP IRA), and a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA).  The SEP and SIMPLE IRAs must be “inactive” -- no employer contributions can be made during the same year in which the rollover is made.

Rollovers are only permitted if the account holder of both the IRA and HSA are the same individual (i.e., no transfers to/from spouse’s accounts allowed).  The guidance applies a “testing period” that must be satisfied when making this type of rollover.  The testing period for these rollovers runs for twelve full calendar months after the month in which the rollover is completed.

If the individual does not remain eligible to contribute to an HSA during the testing period, the rollover amount is taxable and subject to a ten percent penalty.  However, the guidance relieves employers and account trustees/custodians of any responsibility to determine whether an individual remains eligible during the testing period.

Annual HSA Contribution Limit

The 2006 Act also broke the link between HSA policy deductibles and annual contributions to the HSA account.  As a result, individuals can now make the maximum allowed annual contribution to an HSA regardless of their deductible amount. 

However, the IRS had yet to clarify how this would work.  

The IRS released (also on June 4) Notice 2008-52  which clarified that individuals can make the maximum contribution to their HSA as long as their HSA-qualified coverage begins no later than December 1 and he or she maintains their HSA coverage through a "testing period" which runs through the end of the following calendar year.  If an individual does not remain an eligible individual during the testing period, the individual does not have to withdraw the extra amount contributed, just pay taxes on it. 

The IRS demonstrated good flexibility in allowing people to remain eligible even though their coverage might change from family coverage to self-only.  This should help more people retain their eligibility during the testing period.  In addition, the IRS said that employers and trustees/custodians are not responsible for determining whether an individual remains eligible during the testing period.

Guidance on Miscellaneous Issues

On June 25, the IRS released Notice 2008-59, the long-awaited “grab bag” of guidance on HSAs.  The guidance addressed many of the lingering questions that people have had since the early days of the HSA program but have never been formally addressed in written guidance. 

Most of the guidance had been given informally over the past several years, so there were not a lot of “surprises” in the written guidance.  The guidance is straightforward and has helpful Q&A.  The guidance addressed issues relating to:

• HSA eligibility
• Requirements for “high deductible health plans” (HDHPs)
• Limits on HSA contributions
• Qualified medical expenses reimbursable from an
• When an HSA account is considered “established”
• Prohibited transactions
• How HSA administration and maintenance fees are treated

Proposed Regulations

Proposed regulations (REG 120476-07) for a variety of items relating to HSAs, including the forms and due dates for reporting and paying excise taxes for failure to comply with the requirements for HIPAA and for COBRA continuation coverage, were released by the IRS on July 16.  While these forms and due dates are new, employers have been subject to these requirements since the beginning of the program.  Until this guidance, the IRS had not told employers how to comply with the law when they did not meet these requirements.

The proposed rules also prescribe the methods for employers to use for calculating comparable contributions to employees’ HSAs, including the forms and due dates for reporting and paying excise taxes for failure to make comparable contributions.  The statute imposes a 35 percent excise tax penalty on employers that fail to make comparable calendar year contributions to their employees' HSAs. 

The regulations provide special rules within the comparability rules that allow employers to make higher contributions to HSAs for non-highly compensated employees as was allowed under the 2006 HOPE Act.  The proposed rule also would prohibit employer contributions to the HSAs of higher compensated employees from exceeding employer contributions to the HSAs of non-highly compensated employees with comparable coverage during comparable periods.  

These new rules provide the guidance employers need to make greater contributions to non-highly compensated employees without violating the comparability rules.  Making greater contributions under the non-discrimination rules applicable to cafeteria plans is already allowed under current regulations.

The IRS has requested comments on the proposed regulations.  Comments must be submitted online, by mail, or by courier by October 14, 2008.  The IRS will hold a public hearing on the proposed regulations on October 30, 2008 at the IRS headquarters in Washington, DC.

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About the author...

Roy Ramthun is President of HSA Consulting Services, LLC, a health care consulting practice specializing in Health Savings Accounts and consumer-driven health care issues. Mr. Ramthun is also a Visiting Fellow at the Council for Affordable Health Insurance. Click here for Roy's website.