The Tax Relief and Health Care Act of 2006 (HR 6408 as attached to HR 61111) portion known as The Health Opportunity Patient Empowerment Act of 2006:

Repeals the annual deduction limitation on HSA contributions. Under the previous law, the most an HSA holder could contribute to their HSA in 2007 was either their annual deductible amount or $2,850 for single coverage/$5,650 for a family, whichever was less. This bill simplifies contribution limits by setting them to equal just the IRS limit. AFTER December 31, 2006, all HSA holders can contribute up to $2,850 for single coverage and $5,650 for a family as long as they have an HSA-qualified high-deductible plan.

Improves notification regarding the cost of living adjustment. The deductible requirements and contribution limits are indexed against inflation. This means, the contribution limits and deductible requirements are adjusted each year to reflect rising costs. This bill requires the Secretary of the Treasury to make an announcement before June, 1 as to the amount HSA holders can contribute in the following year.

Expands the contribution limit for part-year coverage. Under the previous law HSA holders who opened their accounts after the start of the year could only contribute a pro-rated amount based on the remaining months in the year to their HSA. So, if an account holder opened their HSA on June 1^st, they could only contribute half of the yearly limit even though their insurance deductible is not prorated and is still as high as it would be for someone with a full year’s coverage. This bill permits taxpayers opening an HSA during the year to contribute up to the full annual limit for tax year, not matter when it was opened (the law goes into effect for accounts opened AFTER December 31, 2006).

Permits employers to contribute more to the HSAs of lower-paid employees. Current law requires employers to make comparable contributions to an HSA for all employees. Under this bill, an employer may make higher contributions for non-highly compensated employees, enabling employers to provide additional resources to employees who are neither owners of five percent or more of the business nor among the most highly-paid in the company for tax years AFTER December 31, 2006.

Allows the transfer of funds from Individual Retirement Accounts (IRAs) to HSAs. Under present law, a taxpayer cannot withdraw funds from an IRA prior to age 59 ½ without paying a penalty in addition to income tax (if any) on IRA funds. This bill allows taxpayers to make a one­time distribution (tax-free) from an IRA to an HSA, so HSA funds are immediately available to meet family health needs. The “roll-over” cannot exceed the HSA contribution limit for the year.

Allows employees to fund HSAs with Flexible Spending Account (FSA) and Health Reimbursement Arrangement (HRA) funds. Today, unused FSA benefits, although funded by the employee, expire two and a half months after the end of a year and revert to the employer. HRAs are employer arrangements which allow employees to draw against employer resources, but they do not build any equity or personal savings. Under this bill, employers may allow employees to start an HSA by making a one-time tax-free transfer of FSA and HRA amounts in their accounts to an HSA. The amount must not exceed the balance in the FSA or HRA on September 21, 2006. The transfer must be made before January 1, 2012.