Health Savings Account Tax Break May Not Spur Enrollment

In a new effort to fund health savings accounts, the Internal Revenue Service recently issued guidance on subsidizing HSAs with money from individual retirement accounts.

Individuals covered by a high-deductible health plan that also own a traditional or Roth IRA can make a one-time IRA-to-HSA funding transfer without facing federal income taxes or penalties. The transfer amount, however, cannot exceed the individual’s maximum HSA contribution limit.

In Notice 2008-51, which implements provisions under the Health Opportunity Patient Empowerment Act of 2006, the IRS outlines 10 scenarios on how the rules would apply.

For example, a 57-year-old worker with a maximum annual HSA contribution of $3,800 and an IRA account balance of $13,550 could transfer $3,800 from the IRA to the HSA.

The distribution from the IRA account is not included in the worker’s gross income and is not subject to the additional tax.

As a general rule, IRA- and Roth IRA- holders are subjected to a 10% income tax penalty for premature withdrawals before the age 59-1/2.

The money will have to go directly from the IRA trustee to the HSA trustee. If the individual ceases high-deductible insurance coverage within a one-year period of the transfer, then he or she no longer receives the tax break.

The guidance states that employers are not responsible for notifying the IRS about whether an employee remains an eligible individual during the testing period.

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