WASHINGTON—Legislation to boost the appeal of health savings accounts, given up for dead just a few weeks ago, is on its way to President Bush for his signature.

The HSA provisions, incorporated in a broader tax bill that received congressional approval during this month's brief post-election session, will allow significantly bigger contributions to HSAs, as well as ease grace period flexible spending account-HSA interaction problems.

Additionally, the legislation will pave the way for employers to replace first-generation consumer-driven health care plans with HSAs and ensure that the maximum contributions can be made to employees' HSAs, regardless of when during a plan year they became eligible for coverage.

The legislative changes, especially the one boosting maximum HSA contributions, "will boost the appeal of HSAs enormously. They are of critical importance," said Jeff Munn, a consultant in the Falls Church, Va., office of Hewitt Associates Inc.

The HSA legislation approved by Congress in the closing hours of the session is identical to a measure passed by the House Ways and Means Committee in late September.

At that time, HSA advocates said their strategy was to lobby congressmen to attach the HSA bill to a "must-pass" bill, such as legislation to extend expiring tax code provisions, that Congress was expected to act on during the session.

Advocates acknowledged they faced an uphill battle for two reasons: the staunch opposition of key congressional Democrats plus the more general problem of the HSA measure competing with others to win a place on the broader tax extender bill.

That strategy appeared even more precarious after the November elections put Democrats in line to control the House and Senate when the new session starts in January. Business lobbyists reasoned that Democrats would be unlikely to allow HSA legislation to pass during the lame-duck session knowing that they would control the agenda next year.

Still, business lobbyists kept up the pressure and the HSA provisions were included as part of an agreement on a tax extender measure hammered out by, among others, Ways and Means Committee Chairman and longtime HSA advocate Rep. Bill Thomas, R-Calif., and Senate Finance Committee Chairman Charles Grassley, R-Iowa.

Washington observers say the deal was cemented when House Republican leaders agreed to allow provisions--sought by Sen. John D. Rockefeller IV, D-W.Va.--to help fund retired coal miners health benefits and clean up abandoned mines. Democrats, in turn, dropped opposition to the HSA provisions.

The House overwhelmingly approved the bill, H.R. 6111, on a 367-45 vote and the Senate cleared it by a 79-9 margin. President Bush is expected to sign the bill shortly.

The most significant HSA change involves the maximum annual contribution. Under current law, the maximum contribution is the lesser of either the deductible in the health insurance plan to which HSAs are linked or a statutory indexed amount, which in 2007 will be $2,850 for single coverage and $5,650 for family coverage.

With plan deductibles often in the $1,500 range for single coverage and $3,000 for family coverage, the link between deductible levels and maximum contributions prevented employees from putting more into the accounts.

And raising deductibles wasn't a practical solution since many employees couldn't afford such a significant exposure to uncovered medical expenses.

The legislation addresses this issue by removing--effective in 2007--the link between the maximum HSA contribution and the plan deductible. Instead, the maximum contribution will be the statutory maximum. That will mean, in many cases, that employees will be able to pump hundreds of additional tax-free dollars into their HSAs.

"It is a big plus for those with higher incomes or families with dual incomes," said Randy Abbott, a senior consultant with Watson Wyatt Worldwide in Wellesley Hills, Mass.

Indeed, some observers say the higher contribution limit will help broaden HSAs' appeal so that they become vehicles to save money to pay for current health care expenses as well as those incurred during retirement.

With an HSA much less likely to be depleted by current-year expenses, employees will be able to save for post-employment expenses, said Andy Anderson, of counsel with Morgan, Lewis & Bockius L.L.P. in Chicago. "This moves HSAs to also being a retiree medical savings vehicle."

Solves contribution problem

The legislation also resolves other problems that prevented maximum contributions being made to HSAs, such as the link between HSA and grace period FSAs. Under Internal Revenue Service rules, employers can adopt FSA grace periods so employees can tap FSA balances that remain in the plan at the end of the year to pay for health care expenses incurred during the first 10 weeks of the next plan year.

The problem for HSA enrollees is another IRS rule that says HSA contributions can't be made during the FSA grace period, even if the FSA balance was exhausted at the end of the prior plan year.

The legislation solves that problem by permitting HSA contributions during the grace period if there is a zero FSA balance or if the FSA balance is transferred to the HSA at the end of the prior plan year.

Another problem the legislation resolves is one faced by employees, such as new hires, who become eligible for HSA coverage later in a year. Under current law, the maximum annual contribution to an HSA is pro-rated to reflect when the employee became eligible for coverage.

The latest legislation allows the maximum HSA contribution--regardless of when an employee became eligible for coverage.

Additionally, the bill will allow rollovers from FSAs and/or health reimbursement arrangements on a one-time basis for a limited time. The amount to be transferred cannot exceed the balance in the HRA or FSA at the time of the transfer or as of Sept. 21, 2006, whichever is less.

The rollover provision is aimed at employers who established HRAs, which the IRS approved in 2002, but now want to scrap that in favor of HSAs, which became available in 2004.

While HRAs and HSAs have certain similarities, such as being linked to high-deductible health insurance plans, they have one key difference: While only employers can contribute to HRAs, both employers and employees can contribute to HSAs.