Tax Relief and Health Care Act (H.R. 6111). Public Law 109-432 GPO Budget Estimate

This bill's health savings account (HSA) provisions make several important improvements to help the growing number of Americans enrolling in HSA High Deductible Health Plans (HDHP) and to increase the number of people who will find these plans attractive. 

A summary of the changes follows. (consult your tax advisor for complete Federal and state tax details.)

$2,850 for individuals and $5,650 for families

No contribution reduction for persons who join the HDHP mid-year. 

Consolidation of existing HRA and FSA funds into HSA.  The one-time, tax-free rollover of existing Health Reimbursement Arrangement (HRA) or Flexible Spending Arrangement (FSA) funds will assist employers wanting to transition employees to HDHP coverage. The one-time rollover will help ensure that employees have HSA funds available to them from the start of their coverage.

Elimination of FSA 2 1/2 month rule.  Employers that had considered eliminating the 2 1/2 month grace period from their FSAs because of the negative interaction with HSA rules now may be more inclined to continue the feature. An employee who elects HDHP coverage for January 2007 and who is a participant in a calendar-year FSA that utilizes the grace period would need to spend down the FSA by December 31, 2006 or the employer would need to make the one-time rollover of the FSA dollars to the HSA as previously discussed.  Effective 2007.

Earlier Notification of Cost of Living adjustments.  HSA contribution and out-of-pocket limits have been historically released by the Treasury late in the year, because the Cost of Living indexing period ends in August of each year. This change adjusts the indexing period to end in March, thereby facilitating the release of contribution limits by June 1 each year. This change will provide employers and others impacted by the release of the information with sufficient time to produce materials using the correct information that takes effect in the next calendar. (Effective 2008).

Rollovers of existing IRA funds into HSAs.  Historically, rollovers were not permitted into an HSA from a qualified retirement plan, including an IRA. This changes enables individuals to access IRA funds for HSA contributions by allowing a one-time, tax-free irrevocable rollover from an IRA into an HSA. However, the rollover cannot exceed the HSA contribution limit for the year.  Effective 2007.

Higher contribution limits for lower-paid employees.  Historically, employers were able to contribute to an HSA on a "comparable" basis for all HSA participants. Contributions could not differ based on compensation or job status. The new provision allows employers to provide higher HSA contributions (up to the statutory maximums) to non-highly compensated employees.  Effective 2007.

In addition to the new HSA contribution maximums ($2,850 for individuals, $5,650 for families), the IRS announced the following annual changes for 2007:

Deductible Minimums - $1,100 for individuals, $2,200 for families         
Out-of-Pocket Maximums - $5,500 for individuals, $11,000 for families

Blue Cross Summary of the new 2007 Rules