Mid-year enrolls & contrib limits under 2006 Tax Act

[Guest ColeStevenson]

Under the Tax Relief and Health Care Act of 2006, someone who becomes eligible to contribute to an HSA anytime during the year can contribute up to the full-year HSA limit. That is, proration of the limit isn't required. However under the 2006 tax law there is a penalty if the individual does not remain *eligible* for the HSA until 12/31 of the year following the year of the mid-year enrollment. Said penalty results in any excess amounts contributed (that is amounts that otherwise would have not been allowed under the old proration approach) being taxable - plus a 10% excise tax as well.

On the surface, this all sounds like an individual taxation issue that employers need not worry too much about administering (although they may have to communicate it!) Furthermore, and perhaps more importantly, what about the impact on employers who run all contributions through a cafeteria plan? So if an employee does not stay in the employer's HDHP until 12/31 of the year following the year of the mid-year enrollment, does the employer have to adjust the prior year tax record of the employee to reflect that the certain excess amount run through the cafeteria plan actually was taxable? What if the employee immediately changes employers and picks up HDHP coverage seamlessly. How would the prior employer ever know such?

In short, how is this next-year-end HDHP enrollment requirement monitored and any "failures" reported? Or is this just another "honor system" aspect of HSAs?

Thanks in advance for any help,

Cole

[Jacmo]

Fortunately or unfortunately (depending on whose camp you're in) it's an honor system aspect of HSAs. Ultimately, it's between the employee and the IRS.

The employer has limited responsibility for determining whether an employee's HSA contribution is excludable. An employer is responsible for determining 1) whether the employee is covered under an HDHP sponsored by that employer; 2) whether the employee is covered under a non-HDHP (including health FSAs and HRAs) sponsored by that employer; 3) the employee's age. That's it.