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House Bill Would Boost HSA Contribution Limits

October 2, 2006
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Legislation approved by a House tax panel would enhance the appeal of health savings accounts by increasing contribution limits while opening the door for employers to replace first-generation consumer-driven health plans with HSAs.

HR 6134, which was cleared by the House Ways and Means Committee in the last week of September, does not make the dramatic changes to HSA rules that some employers have sought, such as giving employees the ability to decide on a service-by-service basis whether to tap their HSA, flexible spending account or health reimbursement arrangement.

Still, the changes, which business groups will be urging federal legislators to take up during the special session following the November congressional elections, will "make HSAs more appealing," says Jeff Munn, a consultant in the Falls Church, Virginia, office of Hewitt Associates. "Several important issues are addressed."

"This will go a long way to give enrollees in HSAs, or those who are considering enrolling, greater comfort," says Scott Keyes, a senior consultant with Watson Wyatt Worldwide in Stamford, Conn.

Changes in the measure, introduced by Reps. Eric Cantor, R-Virginia, and Paul Ryan, R-Wisconsin, include:

De-linking HSA contributions to health insurance plan deductibles. Under current law, the maximum annual contribution that can be made to an HSA is the lesser of the deductible of the health insurance plan linked to the HSA, or an indexed amount, set by law, which currently is $2,700 for single coverage and $5,540 for family coverage.

Instead, the legislation would set the contribution limits at the indexed amounts, with the deductible levels in the health insurance plan disregarded. That could mean, in some cases, that hundreds of additional dollars could be contributed to HSAs each year, resulting in bigger account balances that employees could draw on to pay for uncovered health care expenses.

"That would be a very encouraging development and be especially important during the first couple of years after an HSA is set up and the account balance is low," says Tom Hricik, national director, HSA product distribution with ACS/Mellon Financial Corp. in Pittsburgh.

"You solve two problems. You have more money to cover current expenses and you can save more to meet future expenses," says Paul Dennett, vice president of health policy for the American Benefits Council in Washington.

HRA and flexible spending account balance rollovers. The Cantor-Ryan bill would allow employers to roll over unused HRA and FSA balances to employees’ HSAs.

Under the bill, rollovers from FSAs and/or HRAs into HSAs would be allowed on a one-time basis for a limited time. The amount to be transferred could not exceed the balance in the HRA or FSA at the time of transfer or as of September 21, 2006, whichever is less.

That rollover provision is aimed at employers that established HRAs, which the IRS gave the green light to in 2002, but now want to scrap those arrangements in favor of HSAs, which under a 2003 federal law became available in 2004.

While HRAs and HSAs have certain similarities, such as being linked to high-deductible health insurance plans, they have one crucial difference: While only employers can contribute to HRAs, both employers and employees can contribute to HSAs.

Since employees are helping to fund HSAs, a growing number of employers believe they will give employees a greater financial incentive to use health care services more carefully than HRAs since they are putting their own money into the arrangements.

As far as recent employer adoption, HSAs now seem to have more momentum than HRAs, Hewitt's Munn says.

But employers with HRAs that want to make the switch to HSAs have been stymied by one basic problem: They have no simple way of rolling over the balances they have accumulated in the HRAs to employees’ HSAs, a problem that the Cantor-Ryan bill would end by permitting direct rollovers.

Late-year HSA enrollment. Under current law, the maximum annual contribution to an HSA is prorated to reflect when the employee became eligible for coverage. For example, the contribution for an employee who became covered on Dec. 1 would be limited to one-twelfth of the annual maximum.

That limitation is such a concern that HSA sales dry up during the later part of the year, Munn says.

The Cantor-Ryan bill would ease that concern by allowing the maximum HSA contribution, regardless of when during the year an employee became eligible for coverage.

HSA and FSA grace period linkage. Under Internal Revenue Service rules, employers can adopt FSA grace periods so that employees can tap FSA balances that remain in the plan at the end of the year to pay for health care-related expenses incurred during the first 10 weeks of the next plan year.

Since employees will have more time to spend FSA balances, adoption of the grace period reduces the likelihood that employees will have to forfeit FSA balances remaining at the end of the year under the IRS’ use-it-or-lose-it rule.

The problem for HSA enrollees is another IRS rule that says HSA contributions can’t be made during the FSA grace period, even if the FSA account balance was exhausted at the end of the prior year.

The bill would end that problem by permitting HSA contributions during the grace period if there was a zero FSA balance at the end of the prior year or if the FSA balance--as of the end of the plan year--was transferred to the HSA.

IRA-to-HSA transfers. The Cantor-Ryan bill would allow employees with individual retirement accounts to make a one-time tax-free transfer of assets from the IRA to the HSA. The transferred amount could not exceed the legal maximum that could be contributed to an HSA that year.

That feature would benefit employees who just became covered under an HSA, don’t have much money in the account and incur a big medical expense.

With the regular congressional session nearing an end, employers don't expect any action on the bill now. Their strategy is to persuade federal legislators to attach the bill to a "must-pass" measure, such as legislation to extend several popular tax breaks that Congress will consider during its brief lame-duck session that will begin in mid-November.

The Benefit Council's Dennett believes that the HSA measure has a good chance of winning congressional approval because, he says, the proposal is not controversial.

"This would fix some of the mechanics of HSAs. These are a set of various sensible changes and the bill should not be viewed as controversial," he says.

On the other hand, some congressional Democrats are strongly opposed to the bill.

"Why are we dedicating the few remaining hours of this Congress on a bill that does little more than provide a new billion-dollar tax shelter for the healthy," Rep. Pete Stark, D-California, said during the Ways and Means Committee consideration of the bill.

Stark was referring to a Joint Committee on Taxation Committee report that put the cost--in terms of reduced federal tax revenues--at about $1 billion over 10 years.

"There may only be a slight chance of passing the bill, but still a chance," says Henry Saveth, an attorney with Mercer Human Resource Consulting in New York.

--Jerry Geisel/Business Insurance
Geisel is a reporter for Business Insurance, a sister publication of Workforce Management.

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