HR Newsletter

New Developments in Benefits – Recent Changes to Health Savings Accounts

Last December, Congress passed and the President signed into law legislation designed to enhance HSAs, or Health Savings Accounts, starting in 2007. These changes are good news for employers and employees, making the accounts easier to use and more attractive to employees.

Probably the most important change is that participants in an HDHP (High Deductible Health Plan) are now permitted to contribute up to $5,650 (for family coverage) or $2,850 (for individual coverage) to their HSA. Previously, participants could only contribute an amount up to the deductible of their HDHP. In most cases, this new provision will allow participants to set aside more money in an HSA.

How does this change affect employers? Employers can now make their HSAs more attractive to employees – particularly highly compensated ones – by offering an HDHP with a low deductible, because employees' HSA contributions are no longer limited to the deductible. For highly compensated employees who already contribute maximum amounts to IRAs and other retirement accounts, the HSA can become an additional tax-favored savings vehicle. For employees who are not highly compensated, the change is still advantageous: it allows them to save extra tax-free money for future health care expenses, because HSAs roll over from year to year.

The second important change to HSAs affects employees who enroll in an HDHP or HSA mid-year. Previously, mid-year enrollees could only contribute an amount to their HSA that was prorated according to the time of year they enrolled. Now, however, new enrollees can contribute up to the annual maximum ($5,650 family, $2,850 individual), regardless of when they enroll. However, this new rule comes with a stipulation. The participant must remain in an HSA-eligible plan for twelve months following enrollment. If they do not, the amount of their contribution over the prorated amount will become taxable income to them, plus a 10% penalty will be imposed.

Note: The legislation passed in December included other, more technical changes to HSAs and FSAs (Flexible Spending Accounts); for more information about how these changes could affect you or your employees, call your ADP TotalSource professional.

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