Holders of individual retirement accounts can shift some cash into health savings accounts without paying income taxes or penalties on the distributions.

Officials at the Internal Revenue Service explain the procedures for carrying out “qualified HSA funding distributions” in IRS Notice 2008-51.

The notice affects holders of traditional IRAs, who usually cannot take distributions without paying federal income taxes on the cash withdrawn, as well as holders of Roth IRAs, who contribute after-tax income to the accounts and then can take qualified distributions without paying income taxes.

The notice implements an HSA funding distribution provision in the Health Opportunity Patient Empowerment Act of 2006, which created Section 408(d)(9) of the Internal Revenue Code.

An individual who has the right kind of HSA-compatible high-deductible health coverage and is otherwise qualified to contribute to HSAs can make a one-time IRA-to-HSA funding distribution up to the individual’s maximum HSA contribution limit without paying federal income taxes or penalties, IRS officials write in the notice.

In 2009, for example, a 57-year-old individual with $13,550 in an IRA and a maximum annual HSA contribution of $3,800 could transfer $3,800 from the IRA to the HSA without paying taxes on the distribution, officials write.

But, in some cases, an individual might have to pay taxes on the asset transfer if the individual becomes ineligible for the HSA program within a 1-year “testing period,” officials write.

IRS officials give 10 examples of how the rules would work.

“Employers are not responsible for reporting whether an employee remains an eligible individual during the testing period,” officials note.

The rules apply to IRA-to-HSA distributions made in taxable years beginning after Dec. 31, 2006.

In related news, the IRS has released a second notice, IRS Notice 2008-52, which replaces the old HSA maximum contribution limit rules with new rules.

Under the old rules, the maximum contribution was equal to the HSA deductible.

Under the new rules, the maximum contribution will be set at $2,900 for individuals for 2008 and $5,800 for families.

The IRS will increase the maximum each year to reflect the effects of inflation, officials write.