Health Savings Account Improvements

A few days ago, President Bush signed the "Health Opportunity Patient Empowerment Act of 2006" into law. A Treasury Department press release has a very useful summary of the improvements to HSAs:

• Allows rollovers from health FSAs and HRAs into HSAs through 2011.
• Increases the annual HSA contribution limit.
• Full HSA contribution regardless of month individual becomes eligible.
• One-time transfer from IRAs to HSAs.
• Certain FSA coverage treated as disregarded coverage.
• Earlier indexing of cost of living adjustments.
• Allow greater employer contributions for lower-paid employees.

Read the press release if you're interested in more information on those points. I'd like to call out special attention to the increase in the annual contribution limit:

Previously, the maximum HSA contribution was the lesser of the deductible of the individual's HSA-eligible plan or a statutory maximum. The new rules make the limit the statutory maximum contribution, regardless of the individual's deductible. For 2007, the maximum contribution for an eligible individual with self-only coverage is $2,850, and the maximum contribution for an eligible individual with family coverage is $5,650. These limits are indexed for inflation.

I am a strong proponent of high-deductible health care insurance and HSAs. I've been covered by one of these policies since 2005 and during the recent open enrollment period I decided to stay with it for another year. My plan has a $1,200 deductible for 2007, so I expected my maximum HSA contribution to be $1,200. Now that this legislation has decoupled the deductible and contribution limit, I will be able to contribute $2,850.

Because I'm in the 28% Federal and 9% Oregon tax brackets, I originally expected a 2007 tax savings of $444.00 by contributing to my HSA. Due to this legislation, I will actually save $1,054.50.

Yes, I just got a $610.50 tax cut. Outstanding!

It's notable that my $1,054.50 tax savings is nearly as large as my $1,200 deductible. Looking at it another way, my 2007 health care just became approximately free.

(I am not at all concerned about the possibility of accumulating too much money in my HSA. As a technology and medicine optimist I expect to spend every penny of it on life extension therapies someday.)

Unfortunately, this legislation was signed after the open enrollment period had ended. The new incentive structure may induce many people to switch to HSAs, but due to the timing they'll have to wait until next year.