Manufacturers & Distributors ARTICLE -

Tax Law Fluffs up the Feathers in HSA Nests

Target Audience: Manufacturing and Distribution Companies, M&D Industry, Manufacturing Distributors, Marketing Department Employees, Public Relations

Thanks to the Tax Relief and Health Care Act of 2006 (TRHCA), you may have more flexibility in offering health care assistance to your lower-paid workers. The act expands Health Savings Accounts (HSAs) for your employees and allows you to make additional contributions on their behalf.

An Improved HSA

HSAs provide employees who currently are covered by high-deductible plans a tax-advantaged way to fund health care costs. TRHCA improvements allow:

• Contribution limits of up to $2,850 for individuals and $5,650 for families in 2007, regardless of the time of year workers obtained qualified insurance or their deductible,
• Until Jan. 1, 2012, a one-time option to roll unused Flexible Spending Account or Health Reimbursement Arrangement funds into an HSA, and
• A one-time transfer from an IRA to an HSA to meet emergency family health needs.

HSA contributions are pretax, and workers age 55 or older can contribute an additional $800 in 2007. Withdrawals used to to pay qualified health care expenses are tax-free.

How TRHCA Affects You

TRHCA gives you, as an employer, additional flexibility for making contributions to the HSAs of your lower-income workers. Comparable compensation rules require you to make equal contributions for all employees with similar coverage and work status. The act provides an exception that lets you make larger contributions to lower-paid employees’ HSAs.

You also have additional time to plan your contributions. Beginning this year, adjustments to the minimum deductible and out-of-pocket limits on HSA-qualified policies must be announced by June 1, seven months before the end of the year. Inflation-adjusted changes in the annual contribution limits also must be released by June 1. The previous deadline was November, meaning you had about two months to plan for the next year.

Pretax = Less Tax

You aren’t required to allow your employees to change their pretax payroll deductions in response to the new law, but you may both benefit from FICA tax savings if you do. How? Your employees may have less FICA withheld, and you may realize lower payroll taxes. You also don’t have to make contributions to your employees’ HSAs. If you choose to do so, you may contribute up to the maximum amount.

Keep in mind that, if an employee who enrolls in a high-deductible health plan in midyear then contributes the full-year HSA amount, he or she must maintain high-deductible coverage and be HSA-eligible for 13 months beginning in the last month of the year of enrollment.

Failure to do so may result in the employee having to pay income tax and a 10% additional tax on contributions. The IRS hasn’t indicated whether or how much employers are responsible for confirming that employees remain eligible for 13 months.

Planning Made Easier

HSAs are intended to shift more responsibility for health care to individuals. The new law makes it a little easier for them — and you — to plan ahead

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

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