I have a Colorado client that has had an HSA with us for a few years. Her husband is on medicare, so she’s had a high deductible health insurance plan with a family deductible of $5,000 with just her and her daughter on the plan. This spring, her daughter graduates from college and will be getting her own plan, forcing my client to switch from a family deductible of $5,000 to the equivalent single person deductible of $2,500.
The tricky part of the scenario is that my client likes to stuff her HSA with as much money as possible. Since her deductible is $5,000, she put in exactly that amount in 2006. But with the changes in the tax code for HSAs in 2007, she planned on taking full advantage of the full HSA deduction of $5,650 for the year.
But now, she’ll be on the family plan for half of the year and a self-only plan for half of the year. I posed the question to the IRS “Will the new ‘No reduction for partial year coverage’ rule apply to my client in this situation?”
“We don’t know” they said.
I asked, “If she’d already had the plan for 12 consecutive months and already contributed her full amount of $5,650, then completely cancelled the plan halfway through the 2007 calendar year, she would be able to leave those funds in her HSA, correct?”
“Correct.” They replied.
So I continued, “Is it a different situation if she already has the entire $5,650 in the HSA and, instead of cancelling, just dropped to self-only coverage?”
They said, “We don’t know. As far as we know right now, there aren’t any guidelines for that situation and your client will need to wait until there are. Once guidelines are created for that situation, she’ll need to comply with those guidelines to avoid a penalty.”
They wanted to check into it further, so they got my contact information so they could follow up with me as soon as possible. I’ll keep you posted about what I hear from them…
Update: (4/10/07 12:51pm) In order for the ‘no reduction for partial year coverage’ rule to apply, the insured must have the HDHP in December of the calendar year they started coverage. i.e. – the rule is meant to allow people to get an HDHP part way through a calendar year, but doesn’t help people who terminate their HDHP part way through the calendar year.