The Tax Relief and Health Care Act of 2006, signed by President Bush on December 20, 2006, expands existing law pertaining to HSAs to provide increased opportunity for contributions and tax-deferred savings. The following summarizes the main points of the new law:

• Modification of Annual Deductible Contribution Limits. Beginning in 2007, a new annual HSA contribution limit will potentially increase the amount an individual may contribute annually to his or her HSA. This new legislation revises the existing rule that required an annual contribution to an HSA to be limited to the lesser of the annual deductible amount under the terms of an HDHP for an HSA owner or the statutory maximum limit. The new law eliminates the requirement that the annual deductible amount be considered in this calculation, resulting in the statutory maximum being the only limit. For example, an eligible employee with single HDHP coverage and an HDHP deductible of $1700 may now contribute the maximum statutory limit of $2,850 for 2007 to their HSA, versus being limited to a smaller contribution tied to the amount of the HDHP deductible, e.g. $1,700.

• Rollovers Contributions from FSAs and HRAs. Effective December 20, 2006, contributions may be on a tax-free basis made directly to an HSA from either an FSA, HRA or both as long as the individual remains HSA eligible on the last day of the 12th month following the month in which the rollover took place . The rollover amount is limited to the lesser of the employee's FSA or HRA balance on September 21, 2006 or as of the rollover date. There is a limit of one rollover per each Health FSA or HRA per individual. Individuals have until January 1, 2012 to make such a rollover contribution to their HSA and the amount of the rollover will not count towards an employee's annual HSA contribution limit for the year when it is rolled over.

• Rollover Contributions from an IRA. Effective for tax years beginning after December 31, 2006, individuals are permitted a one-time, tax-free rollover contribution from an IRA to an HSA. The amount that can be distributed from the IRA and contributed to an HSA is limited to the otherwise maximum deductible contribution amount to the HSA computed on the basis of the type of coverage under the HDHP at the time of the contribution. To be eligible for tax-free rollover and not subject to the 10% additional tax on early distributions, the rollover contribution must be made as a direct Trustee to Trustee transfer from the IRA to the HSA, and the individual must remain HSA on the last day of the 12th month following the month of the rollover.

• 2 ½ Month "Grace Period" and Cafeteria Plans. If the Cafeteria Plan so elects, unused benefits or contributions remaining at the end of the plan year may be paid or reimbursed to plan participants for qualified benefit expenses incurred during a "grace period". Currently, employees who participate in a Health FSA with a grace period may not participate in an HDHP/HSA arrangement until the first day of the first month after the grace period expires. As a result of this new legislation, the Health FSA coverage is disregarded for purposes of this rule if the balance in the Health FSA at the end of the plan year is zero or the entire remaining balance in the Health FSA at the end of the plan year is contributed as a rollover to an HSA.

• Comparable Contributions. For 2007, the comparable contribution rules have been liberalized to provide potential opportunities for additional HSA contributions for non-highly compensated employees.

• Full Year Contributions for Partial Year Enrollees. Under this new legislation, an individual has the availability to make full year deductible HSA contributions based on partial year HDHP participation as long the individual remains HSA eligible for the 12 months following the contribution. Failure to remain HSA eligible will result in income taxation and penalty on any contributions the individual made. For example, if A enrolls in an HDHP in December of 2007, he may make HSA contributions as if he was enrolled in the HDHP for all of 2007. However, if he ceases to be an eligible individual in June of 2008, an amount equal to the HSA deduction from January through November 2007 is included in income in 2008, and subject to the 10% additional income tax.

It should also be noted that this Act extends for two years the present-law Archer MSA provisions- through December 31, 2007.

An HSA is one of the special tools that can exclusively, or in combination with an FSA, HRA, MSA or Traditional Health Coverage, to offer a health coverage program designed to meet the requirements of an Employer. Some potential good candidates for HSAs are employers who wish to potentially reduce health care expenses by moving Traditional Group Coverage to HDHP Coverage and share the funding of the deductible on a tax-deferred basis, or a partnership whose partners or an S-Corporation whose 2% shareholders cannot participate in cafeteria plan benefits. Of course, an employer will want to review their current health coverage, in addition to cost, flexibility, administrative ease and tax preference when assessing the design or re-design of a program.