This is certainly big news to tell potential clients still on the fence about setting up a Health Savings Account (HSA). Congress has decided to save American taxpayers about $1 billion over the coming decade by loosening up restrictions on how much HDHP holders can contribute to an HSA. Congress' approval this month of H.R. 6111, the "Tax Relief and Health Care Act of 2006,"should greatly improve the popularity of HSAs, particularly among individuals and families purchasing their own health insurance, because it will ultimately let them shield more of their money from the tax collector.
Among the benefits of the new bill:
* It allows people to fund their HSAs with a one-time transfer from their Individual Retirement Accounts (IRAs). Because funds withdrawn from an HSA to pay medical expenses are never taxed, an HSA is a much more tax-advantaged investment than an IRA. This provision will enable someone to quickly maximize their contribution so that they can fully cover the deductible on their high-deductible health insurance plan.
* The bill allows individuals with HSA-qualified policies to contribute up to the annual contribution limit ($2,850 for individual coverage and $5,650 for family coverage in 2007), even if their deductible is less than this amount. Until now, policyholders with smaller insurance-policy deductibles were penalized because they could not contribute as much to HSAs as people with larger deductibles.
* Allows individuals to make the maximum contribution to the HSA, regardless of when the HSA plan began. Taxpayers who purchase an HSA plan later in the year will still be allowed to make the full HSA contribution for that calendar year instead of a pro-rated portion as is currently the case. This will enable them to completely cover their deductible with funds from the HSA if they have some large medical bills, and also gives them the same tax benefits as someone who purchased the plan earlier in the year.