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Which individuals are eligible to make or receive contributions to an HSA?

For any month, an eligible individual is defined as any individual who satisfies all of the following:

1.        is covered only by a high-deductible health plan (HDHP) as of the first day of such month;

2.        is not also covered by any other health plan that is not a HDHP (with certain exceptions for plans providing certain limited types of coverage);

3.        is not enrolled in benefits under Medicare; and

4.        may not be claimed as a dependent on another person's tax return.

An individual (husband) is covered by an HDHP for 2007. He also covers his dependent children under his HDHP. His wife also covers the dependent children under her health plan that is not HDHP, but not the husband. Is the husband eligible to contribute at the higher family coverage level if his dependents are covered by a health plan that is not an HDHP?

Yes. As long as the eligible individual is not covered by his or her spouse's health plan that is not a high deductible health plan, that individual would be eligible to make HSA contributions. Since the dependents are not eligible to make HSA contributions, it does not matter if any dependent is covered by a health plan that is not an HDHP. If an employee has family coverage, the dependents can be covered by another plan that is not an HDHP.

If an employee's spouse participates in a Health FSA during the year and the spouse can be reimbursed for the employee's expenses, will that right make the employee ineligible to participate in a HSA?

Yes, the employee will be ineligible to participate in an HSA for that year even if the spouse never submits a claim for reimbursement of the employee's expenses under the Health FSA.

If an employer adopts a HDHP during the year, may an employee elect to terminate participation in a Health FSA?

No, a change in cost or coverage is not an allowable reason to change an election during the year for Health FSAs.

Can an employee participate in either a Health FSA or an HRA in the same month and still be eligible to make or receive contribution to an HSA?

No, except for the following special situations:

1.        The employee's expenses reimbursed under a Health FSA and/or an HRA are limited to dental, vision and/or preventive care benefits ("Limited Purpose Health FSA or HRA");

2.        The employee suspends participation in an HRA for the year ("Suspended HRA");

3.        A Health FSA or HRA pays expenses above the deductible of the HDHP ("Post-Deductible Health FSA or HRA"). If the deductible limits of the HDHP and the HRA are different, contributions to the HSA are limited to the lower of the deductibles.

4.        HRA pays or reimburses the employee's expenses incurred after the employee retires ("Retirement HRA").

5.        The employee's participation in the FSA is solely due to the FSA's grace period and if (a) the employee would be eligible to participate in the HSA if not for the FSA's grace period and either (i) the employee has no unused FSA balance at the end of the FSA's plan year without regard to the grace period or (ii) the FSA does not provide a grace period for employees who elect to participate in an HSA.

Must an individual participate in an HDHP for the entire calendar year to contribute the full amount?

For calendar years beginning before 2007, yes. For calendar years beginning after 2006, no, but the employee must be covered by the HDHP for the "testing period." The testing period is the period beginning with the last month of the taxable year and ending on the last day of the 12th month following such month.

If an in dividual has family coverage under an HDHP with a $3,000 deductible, how much can he or she contribute for 2006 and 2007?

For 2006: $3,000. For 2007: $5,650. For years beginning in 2007, the requirement limiting HSA contributions to the lesser of specified dollar amount or the annual deductible under the HDHP has been repealed.

A married couple participates in single coverage with two separate HDHPs of unrelated employers with a $4,000 deductible. How much can they contribute to their HSAs?

The total contribution can not exceed $5,650 for 2007. The contribution can be split in any manner as long as one spouse does not contribute more than $4,000 for any year.

Can an employer limit the employees' ability to transfer funds?

No, once contributions are made to an employee's HSA, they are owned by the employee and he or she has complete freedom to transfer funds.

May participants transfer Health FSA or HRA balances to an HSA?

Yes, but the following requirements must be met:

1.        The employer amends the plan effective by the last day of the plan year to allow Qualified HSA Distribution;

2.        A Qualified HSA Distribution has not previously been made for that employee with respect to that Health FSA or HRA;

3.        The employee has HDHP coverage as of the first day of the month during with the distribution occurs, and is otherwise an eligible
individual.

4.        The employee elects by the last day of the plan year to have the employer make a Qualified HSA Distribution;

5.        The Health FSA or HRA makes no reimbursements to the employee after the last day of the plan year;

6.        The employer makes the distribution directly to the HSA trustee or custodian by the fifteenth day of the third calendar month following the end of the plan year, but after the employee becomes HSA eligible;

7.        The distribution does not exceed the lesser of the balance of the Health FSA or HRA on September 21, 2006 or the balance on the date of the distribution;

8.        After the distribution, there is a zero balance in the Health FSA or HRA and the employee is no longer a participant in any non-HAS compatible health plan, or before the first day of the eligible distribution, the general purpose Health FSA or HRA is converted to an HSA-compatible plan for all participants.

Can an individual transfer his or her IRA balances to an HSA?

Yes, but the following requirements must be met:

1.        An individual may make a once in a lifetime contribution to an HSA of an amount distributed from his or her IRA;

2.        The contribution must be made in a direct trustee-to-trustee transfer;

3.        The amount that can be distributed from the IRA and contributed to an HSA is limited to the otherwise maximum deductible contribution to the HSA computed on the basis of the type of coverage under the HDHP at the time of the contribution;

4.        The amount that can otherwise be contributed to the HSA for the year of the contribution from the IRA is reduced by the amount contributed from the IRA; and

5.        No deduction is allowed from the amount contributed from an IRA to an HSA.

If the employee's transfer from a IRA to an HSA meets the above requirements, is the distribution from the IRA taxable to the employee?

No, amounts distributed from the IRA are not includible in the individual's income and such distributions are not subject to the 10-percent additional tax on early distributions from IRAs.

If an employer desires to make contributions to employees' HSAs, what requirements must be met?

An employer must make available comparable contributions (e.g., same amount or the same percentage of deductible) on behalf of all employees with comparable coverage during the same period (e.g., single/family). An employer is now allowed to make larger HSA contributions for non-highly compensated employees than for highly compensated employees. An employer may also make different contributions on behalf of certain specific classifications of employees, specifically part-time employees, former employees, and employees covered pursuant to a bona fide collective bargaining agreement.

Who has to correct the HSA if either the employer or the employee over-contributes to the employee's HSA?

The employee is responsible for any correction in this case.

 "Reprinted with permission from J.P. Morgan Retirement Plan Services LLC, dba JPMorgan Compensation & Benefits Strategies.  (c) 2007 J.P. Morgan Retirement Plan Services.  All rights reserved."