Benefits & ERISA Law

Guidance on Funding Distributions from IRAs or Roth IRAs to Health Savings Accounts

By Suzanne Wynn

Today, the IRS released 2 pieces of guidance for Health Savings Accounts (HSAs) - Notice 2008-51 and Notice 2008-52.

First, the IRS released Notice 2008-51. It provides guidance on Code section 408(d)(9), which was added to the Tax Code in 2006 by Section 307 of the Health Opportunity Patient Empowerment Act of 2006, which was enacted as part of the Tax Relief and Health Care Act of 2006. The guidance is specifically directed at a qualified HSA funding distribution from an individual’s IRA or Roth IRA to a HSA. This guidance provides that a qualified HSA funding distribution is a one-time transfer from an individual’s IRA to his or her HSA and is not subject to the 10% additional tax under Code section 72(t) as this distribution is generally excluded from gross income.

Notice 2008-51 provides that the amount contributed to the HSA through a qualified HSA funding distribution is not allowed as a deduction and counts against the individual’s maximum annual HSA contribution for the taxable year of distribution. The taxability of a qualified HSA funding distribution is also subject to the testing period rules in Code section 408(d)(9)(D). Qualified HSA funding distributions are also restricted to traditional IRAs or Roth IRAs. Ongoing SIMPLE IRAs and ongoing SEP IRAs are not eligible for this type of distribution.

Notice 2008-52 addresses the contribution limits on HSAs and High Deductible Health Plans (HDHPs). When Code section 223(b)(8) was added to the Tax Code by section 305 of the Health Opportunity Patient Empowerment Act of 2006, it changed how an individual’s maximum HSA contribution is calculated. Starting in 2007, an individual’s maximum HSA contribution for the year is the greater of the following:

1. The sum of the limits determined separately for each month under section 223(b)(2), based on eligibility and HDHP coverage o nthe first day of each month, plus catch-up contributions for each month, if applicable (see sum of the monthly contribution limits discussed below), or

2. The maximum annual HSA contribution under section 223(b)(2)(A) or section 223(b)(2)(B) based on the individual’s HDHP coverage (self-only or family) on the first day of the last month of the individual’s taxable year, plus catch-up contributions under section 223(b)(3), if applicable (see full contribution rule under section 223(b)(8)).>

With high deductible health plans becoming more popular, Notice 2008-52 should have immediate impact on health plans.

Full post as published by Pension Protection Act Blog on June 03, 2008 (boomark / email).