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CCH® BENEFITS — 6/10/08

IRS Notice Details Procedures For Full Contribution Limits To HSA

From Spencer's Benefits Reports: In Notice 2008-52, the Internal Revenue Service provides guidance to implement a 2006 amendment to health savings account (HSA) legislation that changes the annual HSA deductible limit.

Under the amendments to IRC Sec. 223, if an individual is eligible for an HSA on the first day of the last month of the individual’s taxable year (December 1 for calendar-year taxpayers), the individual’s maximum HSA contribution for the year is the greater of the following:

  1. the sum of the limits determined separately for each month, based on eligibility and high-deductible health plan (HDHP) coverage on the first day of each month, plus applicable catch-up contributions for each month, or
  2. the maximum annual HSA contribution based on the individual’s HDHP coverage (self-only or family) on the first day of the last month of the individual’s taxable year, plus applicable catch-up contributions.

This full contribution rule is applicable only if the individual remains eligible for an HSA during a “testing period,” which begins on the first day of the last month of the taxable year and ends on the last day of the 12th month following that month. Thus, for a calendar-year taxpayer, the testing period is from December 1 of the current year to December 31 of the following year. This provision is effective for taxable years beginning after Dec. 31, 2006.

If the full contribution limit rules are not met, prohibited amounts are includible in gross income and are subject to the 10% additional tax imposed by IRC Sec. 72(t).

Examples

Notice 2008-52 provides 15 examples to further explain the contribution limit, including the following:

According to the notice, under Sec. 223(b)(8) the individual’s full contribution for 2008 is $5,800. The monthly contribution limits $5,800 divided by 12, or $483.33. The individual’s contribution limit for 2008 would be the greater of $5,800 or $483.33 for the month of December and each month in 2008 in which the individual was a participant.

If the same individual ceased to be an eligible individual as of June 2009, the testing period requirement would not be met and the individual would not be eligible for all of the 2008 contributions. Thus in 2009, the individual would have to include in gross income $5,316.67, the amount contributed to the HSA for 2008 minus the sum of the monthly contribution limits ($5,800.00 - $483.33). In addition, the 10% additional tax ($532) would apply to the amount included in gross income.

According to Notice 2008-52, the individual is an eligible individual with family HDHP coverage on Dec. 1, 2008, and the full contribution limit for 2008 is $5,800. The sum of the monthly contribution limits is $4,350 (9/12 x $5,800). The annual contribution limit for 2008 is $5,800, the greater of $5,800 or $4,350. The testing period for 2008 ends on Dec. 31, 2009. Because the individual is eligible during the testing period, no amount of the $5,800 contribution is included in gross income and is not subject to the 10% additional tax.

Notice 2008-52 will be published in IRB 2008-25, dated June 23.

For more information on Notice 2008-51, contact Leslie R. Paul of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) at (202) 622-6080.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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