September 6, 2006
Employer Contributions To Health Savings Accounts Must Be Comparable
On July 28, 2006, the IRS released final regulations providing guidance on employer contributions to employees’ Health Savings Accounts (“HSAs”). These regulations generally apply to employer contributions to a HSA made on or after January 1, 2007.
As before, nothing requires an employer to make contributions to an employee’s HSA. But if an employer chooses to make contributions to an employee’s HSA, the contribution made to one employee must be comparable to contributions made for similarly situated employees. This is called the “comparability rule.”
“Clarifications” in the Final Regulations
Categories of Coverage. Under the proposed regulations, the categories of coverage were self-only coverage and family coverage. This two-category approach did not reflect the design of many employers’ existing medical plans. The final regulations provide further subdivision of the family category so, for purposes of the comparability rule, coverage can now be: self-only, self plus one, self plus two, and self plus three or more.
Example: Suppose an employer maintains a high deductible health plan that includes the categories of self-only, self plus one dependent, and self plus two or more dependents. An employer would be compliant with this regulation if the employer contributed $750 to the HSA of each eligible employee with self-only coverage, $1,000 to the HSA of each eligible employee with self plus one dependent coverage, and $1,100 to the HSA of each eligible employee with self plus two or more dependent coverage. A disproportionate ratio between the different categories is immaterial provided each category with more dependents receives a higher amount contributed than a category with fewer dependents.
Collectively Bargained Employees. Under the proposed regulations, the comparability rules did not apply separately to collectively bargained and non-collectively bargained employees. Requiring employers to treat union employees the same as non-union employees, without the benefit of bargaining, was very unattractive. The IRS altered its position, excluding from the testing collectively bargained employees covered by a bona fide collective bargaining agreement.
Cafeteria Plan Contributions made to an HSA. Under the proposed regulations, employer HSA contributions made through a cafeteria plan were not subject to the comparability rules. The final regulations provide additional guidance regarding when employer HSA contributions are made through a cafeteria plan. Employer HSA contributions are “deemed” to be made through a cafeteria plan where employees have the right to receive cash or other taxable benefits in lieu of all or a portion of an HSA contribution. The final regulations clarify that this provision means employer contributions will be deemed to be made through the cafeteria plan if the cafeteria plan also provides the ability for employees to make a salary reduction HSA contribution.
Important Note: If deemed to be made through the cafeteria plan, the employer HSA contributions are included in the overall cafeteria plan nondiscrimination testing.
Locating Missing People. The final regulations provide that if an employer makes contributions to former employees, it must make reasonable efforts to locate a former employee. “Reasonable efforts” would include using the IRS or Social Security letter forwarding service.
Providing a Reasonable Rate of Interest. If an employee has not established an HSA at the time the employer funds the HSAs, the employer complies with the comparability rules by contributing comparable amounts plus reasonable interest to the employee’s HSA when the employee eventually establishes the HSA. The final regulations provide that the determination of whether a rate of interest used by an employer is reasonable will be based on all of the facts and circumstances. The Federal short-term rate will be deemed a reasonable interest rate.
What should you do?
If you currently include HSAs in your benefit menu or are considering it in the future, these regulations may change how the HSA operates.
The attorneys at HitesmanLaw, P.A. are experts in dealing with the complexities of benefits plan drafting. With nearly sixty years of combined experience, we know how to take the confusion out of employee benefits law. If you have any questions or would like assistance in establishing or making changes to your HSA contribution program, please feel free to contact us.
The regulations are available at: http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/E6-11991.pdf
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