Eaton Peabody

Congress recently passed the Tax Relief and Health Care Act of 2006, which makes a number of changes to the rules regarding Health Savings Accounts. The changes are generally effective after December 31, 2006. The changes include the following:
·  Eligible individuals may elect a one-time tax free rollover of IRA distributions to a health savings account

The Act allows eligible individuals to make a one time, tax-free, trustee to trustee transfer from an IRA to a health savings account, so long as the amount of the transfer does not exceed the maximum deductible contribution to the health savings account for the year of the transfer.
·  One-time rollover from health flexible spending arrangements and health reimbursement arrangements into health savings accounts permitted through 2011.

Through December 31, 2011, the Act allows for a one-time transfer from both a health flexible spending arrangement and a health reimbursement arrangement into a health savings account, however, the amount that is transferred is limited to the lesser of the balance in the health flexible spending arrangement or health reimbursement arrangement as of September 21, 2006 or the transfer date.
·  Limit on health savings accounts annual contributions is no longer restricted by the annual deductible of the health plan

The limits are now in dollar terms. For 2007, the maximum aggregate contribution is $2,850 for individual coverage and $5,650 for family coverage. Additionally, in the event an individual becomes covered under a high deductible health plan in a month other than January he/she can make the full deductible contribution for that year.
·  Employers can make larger contributions to a health savings account for non-highly compensated employees than for highly compensated employees without violating the comparability rules

The Act allows this so long as the employer makes comparable contributions on behalf of all non-highly compensated employees.

If you have questions or would like additional information, please contact Christine Worthen, a shareholder in Eaton Peabody's
Tax Practice Group.

This alert is provided as general information, and is not a substitute for legal or other professional advice.