A tax break for funding HSAs via IRAs
By Lydell C. Bridgeford, Employee Benefit News
Tuesday, June 10, 2008
Owners of individual retirement accounts who are enrolled in a
high-deductible health plan (HDHP) can now shift IRA
funds to a Health Savings Account (HSA) without facing a
tax penalty. The Internal Revenue Service recently issued
2008-51, which provides guidance on a qualified HSA
funding distribution from an IRA or a Roth IRA.
Under the new rules, individuals covered by a HDHP who also own
a traditional or Roth IRA can make a one-time IRA-to-HSA funding
transfer without facing federal income taxes or penalties, IRS
officials state. The transfer amount, however, cannot
exceed the individual's maximum HSA contribution limit.
In the notice, 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,
the agency explains. As a general rule, IRA and Roth IRA
holders are subjected to a 10% income tax penalty for premature
withdrawals before the age 59 ½.
In addition, the money will have to go directly from the IRA
trustee to the HSA trustee, IRS officials note. If the
individual ceases HDHP coverage within a one-year period of the
transfer, then he or she no longer receives the tax break.
"Employers are not responsible for reporting whether an employee
remains an eligible individual during the testing period,"