The IRS recently issued Notice 2008-52 (“Notice”) to provide guidance on changes brought about by the Health Opportunity Patient Empowerment Act of 2006 (the “Act”), which amended the section of the Internal Revenue Code (the “Code”) dealing with limits on health savings account (“HSA”) contributions.

Effective beginning in 2007, the Act provides that the annual contribution limit will no longer be determined by the deductible under a high-deductible health plan (“HDHP”), but solely by the indexed maximum HSA contribution under Section 223(b)(2) of the Code (for 2008, $2,900 for individuals with self-only HDHP coverage and $5,800 for individuals with family HDHP coverage).  The Act also provides that if an individual is HSA-eligible on December 1st of a calendar year, regardless of being HSA-eligible for the entire year, the individual’s maximum HSA contribution for such year will be the greater of either (1) the sum of the separately determined limits for each month of the year, based on eligibility and HDHP coverage for each month (plus any catch-up contributions, if applicable), or (2) the maximum annual HSA contribution based on the individual’s HDHP coverage as of December 1st (in addition to any catch-up contributions, if applicable).  Part (2) will apply in most situations, except, for example, in situations in which the individual had family HDHP coverage earlier in the year, but self-only HDHP coverage on December 1st.  If an individual is not HSA-eligible on December 1st, then the individual’s contribution limit for the year will be determined by calculating the sum of the monthly contribution limits for each month he or she is HSA-eligible.  For this purpose, the monthly limit is one-twelfth of the indexed amount.
 
To be eligible for the full-year contribution with less than full-year HSA eligibility, individuals must remain HSA-eligible for the thirteen months after December 1st of the relevant year (the “testing period”).  For example, an individual who first becomes HSA-eligible on December 1, 2008, and makes a full 2008 HSA contribution must remain HSA-eligible until December 31, 2009, to keep the full tax benefit.  If an individual ceases to be eligible during the testing period, any contribution exceeding the sum of the monthly contribution limits will be included in the individual’s gross income and subjected to the usual 10% tax.  This tax penalty applies regardless of the age of the account beneficiary.  Though individuals may change their level of HDHP coverage (e.g., self-only to family coverage) during the testing period, they may not prevent the tax consequences by withdrawing the excess contribution.  However, the earnings on that amount will not be affected if they remain in the HSA and are used for qualified medical expenses.

The Notice provides fifteen excellent examples illustrating these and other more-detailed rules.  Link here to review the Notice.  Link here for more information on the recently released 2009 HSA limits.