The outgoing Republican congress enacted a series of changes in Health Savings Accounts aimed at accelerating their growth, which was substantial in the third quarter of this year.

These changes, enacted in the closing hours of the last Congress, addressed a number of areas supporters believe will make them more attractive to individuals and employers.

At the same time, Information Strategies, Inc. (ISI), released its quarterly report on HSA growth. Account custodians reported significant increases in sign-ups in third quarter 2006 reaching 2.4 million on track to total more than 3.6 million on January 1, 2007.  Average account savings were $1,460 representing more than $3.4 billion.  The study is based on a survey of more than 200 financial institutions conducted in October and November of this year.  Current projections are that there will be $5.1 billion in deposits at the end of the year.

Among the changes slated to take effect January 1, 2007 after President Bush signs the legislation are:

1. Allowing individuals to put in the maximum amount of yearly savings even if their deductible is not that high. For instance, next year a family with a deductible of just $2,000 could still put in the maximum of the $5,650; plus a catch-up provision of $800 for those over 55 years.  However, these amounts are expected increase further under the new regulations.
   
   
2. Permits a one-time FSA/HRA/IRA rollover into HSAs.  The one-time rollover is limited to the maximum contribution allowed for that year. This is expected to spur the growth of HSAs by eliminating the fear of being under funded the first year. ISI research indicates that 46% of HSA users have an IRA. Based on its research, ISI predicts that 11% of all HSA users will do just that in 2007.
   
   
3. The new regulations, which must be put together and published by the Treasury Department by year’s end, will allow an FSA rollover into HSAs after year ends on a one time basis.  Employees must remain enrolled in an HSA plan for at least 12 months thereafter.
   
   
4. The cost of living adjustments will also be modified upward adding to the amounts allowed for that year.
   
   
5. Employers will be permitted to vary the amounts they contribute to worker accounts by income.
   
   
6. Individuals who obtain a qualifying insurance plan in mid-year would be able to take the full yearly deduction.  In short, the pro-rata requirement has been almost eliminated.
   
   
7. Archer MSAs were extended another two years.

Critics of the bill are already emerging; they argue that these changes would likely encourage more employers to switch from HRAs to HSAs.  They believe many employers provide HRAs rather than HSAs, and employers (as well as their employees) may be reluctant to switch to HSAs without having the option to transfer existing HRA balances to employees’ HSAs on a tax-free basis.  This provision would facilitate these switches, critics say.

However, ISI has found that many larger employers, many of whom are self insured, prefer the ability to manage the monies and have a “slush fund” generated by employees leaving the company and forfeiting the monies accumulated. The new HSA provision on HRA-HSA rollover may prove to be a greater benefit to employees by permitting them to take some of these accumulated funds with them, a win-win for both employer and employee.

The cost estimates for the bill was projected at slightly over $1 billion.  However, some of the provisions are expected to generate more savings for individuals and their families. ISI believes ultimately these new rules will add more than $2 billion in tax savings to HSA users over the next two years.

Some critics also believe the changes will encourage investment managers such as Fidelity to quickly enter the sector as account custodians.  At the same time, banks will need to scramble to develop IT programs to facilitate the movement of funds from IRAs to HSAs.

Some critics are also worried that higher income individuals will move into HSAs and choose lower deductibles.  They postulate that letting people have a low deductible and still make a full contribution, meaning that the idea of HSAs as ‘high-deductible’ just disappeared. The big concern, they say, is the comparable contribution rule, which will allow HSAs to have more custom-designed benefits.
Employers will also be able to create more custom designed programs fitting closer to their particular workforce needs.