HSAs Tweaked, Again; Mental Health Parity Act Reauthorized For One Year

(Published January, 11, 2007)

As part of some session-ending legislative housekeeping, Congress enacted the Tax Relief and Health Care Act of 2006 (P.L. 109-432). The law extends the Mental Health Parity Act (MHPA) for one more year and rejiggers the rules that apply to health savings accounts (HSAs).

Health Savings Accounts 

The new law allows employees to roll amounts in their flexible spending accounts (FSAs), health reimbursement accounts (HRAs), and IRAs directly into HSAs. Other favorable changes were made to the HSA rules, as well. 

Rollover rules. Employees get one shot to make a direct trustee-to-trustee rollover from an FSA or HRA. The amount that can be rolled over is limited to the lesser of the balance in employees' FSAs or HRAs as of September 21, 2006, or the cash balance in those accounts as of the distribution date (i.e., expenses incurred that haven't been reimbursed as of the date the determination is made aren't counted). Rollovers from FSAs or HRAs don't count toward the annual contribution limits. Comparability rule: If you allow any employee to make a rollover, you must allow all employees covered under the high-deductible plan to make rollovers. Rollovers can't be made from simplified employee pensions (SEPs) or SIMPLE retirement accounts. 

Rollovers must be made into HSAs by January 1, 2012. 

Disregarded coverage. Employees covered by high-deductible health plans (with HSAs) can't be covered by any health plan that isn't a high-deductible health plan. This precludes employees from also having FSAs and HRAs. There are limited exceptions. In addition, FSAs are allowed a 2½-month grace period after the end of a plan year during which employees may use up the last year's contributions. 

In conjunction with the new rollover rules and beginning this year, for HSA purposes, grace-period amounts will fall into the category of limited exceptions and, therefore, be considered disregarded coverage. Impact: If coverage is disregarded, employees will be eligible to open HSAs. Coverage will be disregarded if:

• the balance in employees' FSAs is zero; or

• employees roll over their entire remaining balance into HSAs. 

Limitations on contributions. Employees' HSA contributions had been limited to the lesser of the annual deductible for the underlying high-deductible health plan or an inflation-adjusted amount. Beginning this year, the maximum contribution is no longer limited to the annual deductible under the high-deductible health plan. Thus, for 2007, the maximum aggregate annual contribution is $2,850 (self-only coverage) and $5,650 (family coverage). 

Full contributions for employees who don't participate for a full year. Beginning this year, employees who become eligible for an HSA at any time before a year ends can contribute up to the maximum amount for that year. Employees, therefore, can contribute for months before they were enrolled in the high-deductible health plan. Employees who lose eligibility for the high-deductible health plan during a "testing period" must include contributions attributable to months preceding the month they first became eligible for the HSA in gross income. The testing period begins with the last month of the year and ends on the last day of the 12th month following that month. The 10% additional tax applies. 

Comparability rules. Under the comparability rules, if employers contribute into the HSA of any eligible employee, they must contribute a comparable cash amount or percentage of the high-deductible health plan's deductible into the HSAs of all comparable participating employees as of the first day of each month. Employers can contribute more, less, the same, or nothing into the HSAs of employees in different groups, provided contributions for all employees within a group are the same cash amount or percentage of the high-deductible health plan's deductible. 

Beginning this year, employers may contribute more into the HSAs of non-highly-compensated employees. Highly-compensated employees are defined under the rules that apply to 401(k) plans. The comparability rules continue to apply, so employers must make comparable contributions into the HSAs of all non-highly-compensated employees with comparable coverage. 

Mental Health Parity 

No substantive changes were made to the MHPA. It now expires December 31, 2007.

The MHPA requires that annual or lifetime dollar limits on mental health benefits be no lower than the dollar limits for medical and surgical benefits offered by a group health plan. It applies to group health plans (or health insurance coverage offered by issuers in connection with group health plans) that provide both medical/surgical benefits and mental health benefits. 

An excise tax of $100 a day is imposed on employers sponsoring non‑compliant plans. The maximum tax is the lesser of 10% of employers' group plan expenses for the prior year, or $500,000. Employers can beat the tax if they can prove that they didn't know, and exercising reasonable diligence, wouldn't have known, that a failure occurred.

Related Topic(s): Benefits - Flexible Benefits