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Allows certain direct transfers from a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) into a health savings account (HSA) when a person enrolls in a high-deductible health plan (HDHP) after a long break in coverage. It creates a capped “qualified HSA distribution,” reduces the taxpayer’s HSA contribution limit by the transfer amount, requires the remaining FSA/HRA to be HSA‑compatible for the rest of the plan year, and requires employers/plan administrators to report the distribution amount on the employee’s tax information. The rule applies to distributions made after December 31, 2025.
Defines the term “qualified HSA distribution” as a distribution from a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) directly to an employee’s health savings account (HSA) if (i) the distribution is made in connection with the employee establishing coverage under a high deductible health plan after a significant period of not having such coverage, and (ii) the arrangement is described in section 223(c)(1)(B)(iii) for the portion of the plan year after the distribution.
Limits the aggregate amount of distributions from FSAs and HRAs that may be treated as qualified HSA distributions in connection with establishing HDHP coverage to the dollar amount in effect under section 125(i)(1). For certain coverage described in section 223(b)(2)(B), the limit is twice that amount.
Adds a new subparagraph (D) to section 223(b)(4) providing that the portion of any qualified HSA distribution that reduces the limit on deductible HSA contributions is limited to the aggregate increases in the balance of the arrangement from which the distribution is made that occurred during the portion of the plan year preceding the distribution (excluding prior-year carryovers and ignoring decreases during that portion).
Amends section 223(c)(1)(B)(iii) to allow coverage under an FSA or HRA for the portion of the plan year after a qualified HSA distribution is made only if the terms that apply for that portion of the plan year would, if they applied for the entire plan year, make the arrangement not count under subparagraph (A)(ii) of section 223(c)(1)(B). (This makes the arrangement HSA-compatible for the remainder of the plan year after the distribution.)
Amends section 6051(a) to require that the amount of any qualified HSA distribution with respect to an employee be reported (added as a new paragraph (18)), and makes a conforming amendment to section 6051(a)(12).
Who is affected and how:
Owners of Health Savings Accounts (HSA holders): Individuals who establish HDHP coverage after a long lapse can move a limited amount from an existing FSA or HRA into an HSA, increasing HSA balances and flexibility. The transfer amount, however, reduces the taxpayer’s remaining HSA contribution room for the year.
Employees and covered individuals: People switching into HDHPs after a break in coverage gain a new option to preserve some pre-tax FSA/HRA funds by transferring them to an HSA, subject to the cap and contribution-limit reduction.
Employers, plan sponsors, and plan administrators: Must update plan designs and documents to allow and effectuate these transfers, ensure transferred plans are HSA‑compatible for the rest of the year, and include the transfer amounts in employee tax reporting. This adds operational and compliance steps for payroll/benefits teams and third‑party administrators.
Group health plans and HR systems: Need technical changes to track qualifying transfers, apply the cap and contribution-limit adjustments, and produce required tax reporting. Insurers/TPAs may need new processes and disclosures.
Tax administration and revenues: The change alters the tax treatment and routing of pre-tax health benefit dollars; revenue effects are likely modest and timing-based because funds remain in tax-advantaged accounts but move between account types.
Overall impact: The provision is targeted and technical. It increases flexibility for individuals moving into HSAs after coverage gaps while imposing moderate administrative and reporting responsibilities on employers and plan administrators. The policy is narrowly scoped and unlikely to produce large fiscal or market disruptions.
Replaces subsection (e)(2) of 26 U.S.C. 106 to add a definition of 'qualified HSA distribution' and set an aggregate dollar limitation for such distributions.
Adds a new subparagraph (D) to 26 U.S.C. 223(b)(4) providing a partial reduction rule for the limitation on deductible HSA contributions for amounts attributable to qualified HSA distributions.
Revises the rule in 26 U.S.C. 223(c)(1)(B)(iii) regarding when coverage under an FSA or HRA after a qualified HSA distribution is treated as HSA-compatible for the remainder of the plan year.
Amends 26 U.S.C. 6051(a) to require reporting of qualified HSA distributions on the information furnished with respect to employees.
Makes a conforming textual amendment to 26 U.S.C. 6051(a)(12) in connection with the insertion of the new reporting paragraph for qualified HSA distributions.
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Referred to the House Committee on Ways and Means.
Introduced April 7, 2025 by Aaron Bean · Last progress April 7, 2025
Referred to the House Committee on Ways and Means.
Introduced in House