The Tax Relief and Health Care Act of 2006, approved by the U.S. Congress in December expands Health Savings Account (HSA) annual limits and funding sources, as well as providing increased flexibility for employers who choose to fund the account.

Annual Limits
The new bill allows you to deposit up to the annual contribution limits, regardless of your qualified health plan deductible. The current limits are $2,700 for individual coverage and $5,450 for family coverage. Previously, contributions were limited to your health plan deductible if it was below the annual contribution limit.

In addition, you are now able to make an HSA contribution for the full annual limit even if your health plan coverage is not a full-year plan. This is important to those who begin coverage mid-year, as the full deductible still applies. The contribution was previously limited to a pro-rated limit based on the number of months of HSA-qualified coverage. You must maintain coverage in the qualified high-deductible health plan for a full year beginning in the month the HSA is opened or be subject to tax and penalty.

Roll Overs from other Funding Sources
Employers and employees now have a one-time opportunity to roll over unused funds from an existing Health Reimbursement Account (HRA) or a Flexible Spending Account (FSA) into an HSA. This one time transfer of funds would be tax-free, as long as the money is used for qualified medical expenses. Transfers must be made prior to January 1, 2012.

Individuals can also now make a one-time transfer of funds from an Individual Retirement Account (IRA) into an HSA. The money rolled over can not exceed the annual contribution limit.

Employer Flexibility
Employers are allowed to contribute more for lower-paid employees. Comparability rules have required equal dollar contributions to all non-highly compensated employees. This exception provides employers the flexibility to contribute more to the HSA accounts for their lower-paid workers.

Annual Announcements
The new bill also requires that annual adjustments to minimum deductibles and annual contribution limits be announced by June 1st of each year, allowing time for insurance carriers to make decisions about product and plan design changes. This in turn should provide more time for employers and employees to fully understand their options and make informed decisions on health plans and HSA contributions.

These changes were effective January 1, 2007.

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