A tax break for funding HSAs via IRAs
By Lydell C. Bridgeford, Employee Benefit News
SourceMedia, Inc.
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 Notice 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," officials add.

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