Feds Let IRA Money Fill Health Savings Accounts

August 29, 2008
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GRAND RAPIDS — People with high-deductible health insurance plans can be stuck with a big, expensive question: How do they fund the Health Savings Account that goes along with it?

Sometimes they are able to use pre-tax payroll deductions; sometimes they set up accounts at a financial institution to accept tax-deductible deposits.

But in June, the Internal Revenue Service issued guidance for another option: a provision of the Health Opportunity Empowerment Act of 2006 that allows a one-time transfer of money from a traditional or Roth individual retirement account to an HSA.

“This is an exciting thing,” said Amy Chambers, Priority Health’s associate vice president for market development, and the Grand Rapids-based health insurer’s resident expert on Health Savings Accounts.

Normally, money in a traditional or Roth IRA is restricted for use after age 59 1/2. With a few exceptions, withdrawing IRA funds prior to that age could result in taxes and penalties.

Now, however, the IRS will allow those with IRA investments to transfer them to HSAs and be used, without federal taxes, for current or future health-related expenses.

“We try to educate people, maybe not the first time around when they are learning about HSAs, but certainly the second time,” Chambers said. “People are definitely interested in it.”

While every situation is unique to the individual, the law allows these types of transfers once in a lifetime, Chambers explained, so the provision needs to be exercised carefully to maximize the benefit.

“Pick your year, when you can maximize what you can roll over,” Chambers said.

The transfer limit is the same as the HSA investment limit. In 2008, that’s $2,900 for a person with an individual, eligible high-deductible insurance plan, and $5,800 for a person with a family plan.

However, the recently released regulations state those can be combined — for example, if a person were to start the year with an individual plan, then get married and switch to a family plan. That would put the limit at $8,700.

“And, if you’ve already put $2,000, for example, into your HSA for the year, you’ve got to subtract that out,” she added.

“What they didn’t allow is people with incredibly huge IRAs to roll them over, 100 percent.”

One other catch: The person must retain the high-deductible health care plan, remaining eligible for an HSA, for one year after the rollover.

Once all the conditions are met, the money is like any other HSA dollar and can be withdrawn, free of federal taxes, for such health expenses as deductibles, co-pays, dental care orthodontics and vision care.

It’s that tax-free withdrawal for health expenses that can make the IRA rollover attractive, Chambers said.

“If you have a traditional IRA, when the money comes out, it’s taxed. With the Roth IRA, it comes out untaxed,” Chambers explained.

“The traditional IRA can transfer to an HAS, and you can spend on qualified medical expenses that money that you took a deduction on when it went in. It grew tax-free, although it was going to get taxed when it came out. (As an HSA) it comes out tax-free. It’s like getting a triple tax preference.”

High-deductible health plans, for those under age 65, anticipate that deductibles will be covered by HSAs in exchange for lower premiums. Because the consumer owns the HSA, they are expected to shop around for value and quality.

HSAs generally are suited for people who are so healthy that they don’t use them much, and so are able to stockpile money for some future day when they do run into high health care expenses. Unlike flex accounts, HSA money is rolled over year to year, and the employee keeps the account even with a job change. An individual can set up an HSA independently of health insurance plans.

America’s Health Insurance Plans, a national trade organization, found that as of January, 6.1 million Americans were covered by high-deductible plans in combination with HSAs, up from 3.2 million in January 2006.

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