Health Savings Accounts
Employer Contributions to Employee
Accounts
When is a Contribution Comparable?
Consumer-driven health doesn't work if
the consumer is not engaged. Accounts
are critical to making that happen.
UnitedHealthcare recommends that
employers encourage enrollment and
engagement by contributing to their
employees' HSAs . This summary of
pending IRS guidance will help guide
employers to set up compliant
contribution plans. Below are some
highlights:
-Employers contributing to HSAs must
ensure that their contributions comply
with the IRS' comparability rules.
Failure to comply with these rules could
result in a 35% excise tax on the total
amount contributed to all HSAs.
-Comparable contributions must be the
same for all employees enrolled in the
same HSA HDHP coverage type, defined as
either self-only or family coverage, in
the form of the same dollar
contribution amount or the contribution
as a percentage of the HDHP deductible.
-Comparable contributions may only vary
by employee status as either current
full-time, current part-time or former
employees.
-Comparable contributions may not vary
by management versus non-management
employees or by collectively bargained
employees.
-Contributions must be made for each
month that the eligible individual is in
the HDHP regardless of when the
employee establishes their HSA so long
as the account is established prior to
the end of the calendar year. .
-Contributions
that are pre-funded must be paid on a
pro-rated basis for employees hired
after the initial funding date.
-If contributing under a Section 125
plan, the contributions must satisfy
relevant non- discrimination rules.
Overview
In August, the Treasury Department
released proposed regulations (70 Fed.
Reg. 50233 (August 26, 2005) to clarify
or refine the rules related to employer
contributions made to Health Savings
Accounts (HSAs). While not yet
effective, Treasury indicates that
employers can rely on the proposed
regulations until the date that they are
finalized. As a result, they may be of
interest to employers making plans now
for the 2006 plan year. (Ultimately,
Treasury proposes to make the
regulations effective for contributions
made on or after the date that final
regulations are published.)
Employers may make contributions to
employee HSAs. These contributions must
be an equal amount or equal percentage
of the deductible for comparable
participating employees. If the
contributions are not considered
comparable, the employer is subject to a
35% excise tax on the total amount
contributed to all HSAs. As an
alternative to making comparable
contributions, an employer may make
contributions to employee HSA accounts
under a Section 125 plan. However, the
proposed regulations suggest that in
order to make contributions under a
Section 125 plan, an employer must offer
employees a choice between the
contribution and cash. Those
contributions are then subject to the
non-discrimination rules of Section 125.
The proposed regulations clarify when a
contribution is considered comparable,
and what groups of employees must be
considered when evaluating
comparability. In addition, the
proposed regulations provide new rules
concerning contribution methods and
frequency of contributions. The
proposed regulations are in Q&A format
and include several examples.
Following is a short summary of the
recent guidance. This is not intended
as legal or tax advice, and employers
should consult their own legal and tax
counsel when finalizing their plans.
Impact
-An employer who makes contributions to
employee HSAs that are not comparable
contributions faces an excise tax equal
to 35% of the aggregate amount
contributed by the employer to all HSAs
during that calendar year.
-All or a portion of this excise tax
may be waived if the failure to comply
is due to reasonable cause and
not willful neglect, and the payment of
the excise tax would be
excessive relative to the
failure of compliance.
Comparable Contributions
-Contributions are comparable if they
are either the same dollar amount or the
same percentage of the
deductible.
-Comparable contributions are required
for comparable participating employees.
Comparable Participating Employees
-If two married employees work
for the employer and are covered as a
family under one of them, the
employer need only make a comparable
contribution to the HSA of the
individual enrolled in the
HDHP as an employee, not to the HSA of
the individual who is enrolled
as a spouse.
-Comparability rules may be applied
separately to different categories of
employees.
-The allowed categories
are:
-current full-time employees,
-current part-time employees, and
-former employees (excepting people with
COBRA continuation coverage).
-Thus,
an employer could make comparable
contributions to the HSAs of full-time
employees, not part-time employees,
and still satisfy the requirements.
-If an employer contributes to the HSAs
of any former employees, it must make
comparable contributions to the
accounts of all comparable participating
former employees. However, employers
are not required to make contributions
to the HSAs of former employees
participating in the HDHP under a COBRA
continuation. The employer may limit
its contributions for former employees
to those employees who have coverage
through the employer's HDHP (except
for COBRA beneficiaries).
-The
three allowed categories noted above are
the only allowed categories for
comparability testing. The following
are not considered separate categories
of employees. Thus, an employer must
include individuals in these groups when
making comparable HSA contributions.
-Collectively bargained employees
-Management/non-management employees
-Note
that if the HDHP is only offered to a
certain group of employees, such as
non- management employees, only those
employees in the plan are comparable
participating employees for whom the
employer must make comparable
contributions. In this situation, the
management employees are not comparable
participating employees in the plan,
and the employer would not be required
to make comparable HSA contributions for
them.
-Contributions made to the HSAs of
independent contractors, sole
proprietors and partners of a
partnership are not considered under
the comparability regulations.
-Comparability regulations apply
separately for employees with HSAs and
those with Archer MSAs. If the
employee has both, the employer may
contribute to one, not both.
Employees Not Enrolled in the Employer’s
High Deductible Health Plan
-The employer is not required to
contribute the HSAs of employees who do
not participate
in the employer-sponsored high deductible health plan. However, if the
employer
contributes to the HSA of anyone with coverage under another high
deductible health
plan, the employer must make comparable contributions to the HSAs of all
comparable participating employees
whether or not covered by the employer’s
plan.
Matching/Incentive Contributions
-The comparability regulations do not
permit employer contributions based on
the
following on the premise that
not all employees will meet the
requirement or elect to participate
and thus, not all are eligible to
receive the same contribution:
-Employee contribution amounts (or
a percentage thereof) (i.e., matching
contributions).
-Participation in health assessments,
disease management or wellness
programs.
-Employee age or years of service.
-Employers may be able to make HSA contributions based on these factors
under a
Section 125 Plan. See below.
Contribution Processes
-Comparable contributions must be made
for each month that the employee is an
eligible individual under the proposed
regulations as long as the employee
establishes an HSA before the end of
the calendar year. Thus, if the
employee is an eligible participant for
the full calendar year, but does not
open the HSA until July, the employer
must make contributions for that
individual for the entire year. The
employer does not have to make
comparable contributions for a calendar
year if the employee fails to open an
HSA before December 31st of
that year.
-Comparable contributions must be made
for each month that the employee is an
eligible individual under the
regulations.
-Employers may fund comparable
contributions periodically over a
calendar year as long as the same
contribution (amount or percentage of
deductible) is made for employees in the
same category of coverage at the same
time.
-If contributions are based on
payroll cycle and employees have
different payroll cycles,
that will still meet the
comparability requirements.
-Alternatively, employers may make
contributions at the end of the calendar
year (up to April 15th of
the following year).
-Contributions may be pre-funded at the
beginning of the calendar year.
-The proposed regulations will not be
violated if an employee terminates
employment during the year and
thus receives more contribution on a
monthly basis than employees
who worked the full year.
-The employer must make comparable,
pro-rated contributions for employees
hired after the initial funding
date.
-For an employer who realizes that its
contributions will not meet the
comparability rules for a calendar
year:
-The employer may make
additional contributions (through the
next April 15th) to satisfy
the regulations.
-The employer may not recoup
funds from employees’ HSAs to correct
the issue.
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