NC Healthcare Coverage Blog

The House of Representatives approved the Tax Relief and Health Care Act of 2006 (H.R. 6111) (”the Act”) on December 8, and it was approved by the Senate on December 9. President Bush signed the Act into law on December 20, 2006. Most provisions apply to taxable years beginning after December 31, 2006.

Note: Read the following provisions carefully. Some have applications to both our Blue Options HSA product for Groups and Blue Options HSA for Individuals, while others may apply to our group product only.

The Act provides for the following:

• Modifies the limit on contributions to HSAs. Currently, HSA maximum
  contributions are limited to the lesser of (i) 100% of the annual deductible limit of the high deductible health plan (HDHP) or (ii) $2,850 (self-only) and $5,650 (family coverage) for 2007. Under the new provision, eligible individuals will be able to contribute up to $2,850 (self-only) and $5,650 (family coverage) for 2007, regardless of the annual deductible amount.
• Allows individuals who become covered by a HDHP mid-year to contribute up to the full annual limit. Currently, if an employee or individual joins an HDHP mid- year, the maximum amount they can contribute to the HSA must be prorated for the months the employee did not have HDHP coverage as of the first day of the month. Under the new provision, an employee who becomes eligible for a HDHP mid-year
  may make a full HSA contribution for the year. However, the contributions made for the months preceding their HDHP eligibility may be includible in gross income and subject to a 10% additional tax if the employee loses eligibility for the HDHP during the 13 months following the date of contribution. The tax would be incurred during the taxable year of the month the employee loses eligibility.
• Permits transfer of balance from an FSA or HRA to an HSA. Currently, funds may not be transferred from an FSA or an HRA to an HSA. Under the new provisions, the employer may allow for a one-time transfer from an FSA or an HRA. The maximum balance that may be transferred is the lesser of the balance of the account as of September 21, 2006 or the balance on the date of the transfer. The transfer may be made on or after December 20, 2006 until January 1, 2012. The transferred amount is not subject to maximum contributions limits. If allowed by the employer it must be allowed for all employees. However, the contributions made for the months preceding their HDHP eligibility may be includible in gross income and subject to a 10% additional tax if the employee loses eligibility for the HDHP during the 13 months following the transfer date. The tax would be incurred during the taxable year of the month the employee loses eligibility.
• Permits a one-time transfer from an IRA to an HSA. Currently, funds may not be transferred from an IRA to an HSA. Under the new provision, the employee or individual may chose to have a one-time rollover from an IRA to an HSA. The amount of the rollover is subject to the maximum HSA contribution limit for the year. However, the contributions made for the months preceding their HDHP eligibility may be includes in gross income and subject to a 10% additional tax if the employee or individual loses eligibility for the HDHP during the 13 months following the transfer date. The tax would be incurred during the taxable year of the month the employee loses eligibility.
• Requires earlier announcement of Cost of Living Adjustments applicable to HSAs. Annual cost of living adjustments (used to index HDHP minimum deductibles, out-of-pocket maximums, and contribution maximums) will be announced by June 1 of each year.
• Permits higher HSA contributions for non-highly compensated employees. The new provision provides an exception to the requirements that employers must provide comparable HSA contributions to all employees, permitting employers to make higher contribution for non-highly compensated employees.
• Allows coverage under a health FSA during the “2 1/2 Month Grace Period” to be disregarded for eligible employees who have a zero balance in their HSA for the previous year. If an employee has an FSA grace period of 2-1/2 months or less at the beginning of the plan year, the new provision provides that if an eligible employee has a zero balance in their FSA (either through depletion or through a transfer of the balance to an HSA) the employee may contribute to their HSA during the grace period. This provision is effective December 20, 2006.

If you have any questions, please refer to the Department of Treasury web site at http://www.treasury.gov or contact your BCBSNC representative.