5500 Preparer's Manual for 2012 Plan Years
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From Spencer's Benefits Reports: In Notice 2008-51, the Internal Revenue Service details guidance to implement a 2006 amendment to health savings account (HSA) legislation that provides plans the option to allow employees to start an HSA by making a one-time tax-free transfer of individual retirement account (IRA) funds.
The qualified HSA funding distribution detailed in IRC Sec. 223 is a one-time transfer from an individual’s IRA to his or her HSA that is generally is excludable from gross income and is not subject to the 10% additional tax under IRC Sec. 72(t). The tax advantages are available only if the individual making the transfer remains an eligible individual during the entire “testing period,” which is defined as a period “beginning with the month in which the qualified HSA funding distribution is contributed to a health savings account and ending on the last day of the 12th month following such month.”
The amount contributed to the HSA through a qualified HSA funding distribution is not allowed as a deduction and counts against the individual’s maximum annual HSA contribution for the taxable year of the distribution.
Generally, only one qualified HSA funding distribution is allowed during the lifetime of an individual. If, however, the distribution occurs when the individual has self-only high deductible health plan (HDHP) coverage, and later in the same taxable year the individual has family HDHP coverage, the individual is allowed a second qualified HSA funding distribution in that taxable year.
Notice 2008-51 provides ten examples to further explain the one-time transfer, including the following:
The $2,000 distribution is a qualified HSA funding distribution, and accordingly is not included in gross income and is not subject to the additional tax under Sec. 72(t). A’s testing period begins in April 2008 and ends on April 30, 2009. After the qualified HSA funding distribution of $2,000, $3,800 of A’s 2008 HSA maximum annual contribution remains.
If A ceases to be an eligible individual before April 30, 2009, the $2,000 transfer would be includible in gross income, and would be subject to an additional tax of $200 (10% of the amount included in income).
On August 1, the individual enrolls in family HDHP coverage. A transfer of $3,000 is made from the IRA to the HSA on Aug. 15, 2008.
According to the notice, “the $2,800 and $3,000 distributions are qualified HSA funding distributions.” The distributions from the IRA are not included in gross income and are not subject to the additional tax under Sec. 72(t). The qualified HSA funding distributions of $5,800 ($2,800 + $3,000) equal the individual’s 2008 maximum annual HSA contribution. The testing period for the first qualified HSA funding distribution begins in June 2008, and ends on June 30, 2009, and the testing period for the second qualified HSA funding distribution begins in August 2008 and ends on Aug. 31, 2009.
Notice 2008-51 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.
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