Guest Article

(From the April 21, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues More Guidance on HSA Comparable Contribution Requirements

The IRS on April 16, 2008 issued final regulations on two minor -- but important -- issues relating to applying the health savings account (HSA) employer comparable contribution requirements. 73 FR 20794 (April 17, 2008). Specifically, the final regulations provide a way for employers to satisfy the comparable contribution requirement for a year with respect to eligible employees who have not established, or who have not told the employer they have established, an HSA by December 31. Additionally, the final regulations permit employers to accelerate HSA contributions for certain employees who have incurred medical expenses without violating the comparable contribution rules.

These issues were initially addressed in proposed regulations the IRS issued last year. These final regulations adopt the proposed regulations "without substantive revision."

Summary of Comparable Contribution Requirements

Only "eligible individuals" may fund HSAs. An eligible individual is someone who is covered by a high-deductible health plan (HDHP) and no other plan that is a non-HDHP, subject to certain limited exceptions.

Employers do not have to contribute to employees' HSAs, but if they do they must make "comparable contributions" to the HSAs of all "comparable participating employees." Employer contributions are comparable if they are the same dollar amount or the same percentage of the annual deductible under the employees' HDHPs. The term "comparable participating employees" generally refers to employees who are eligible individuals covered by the employer's HDHP and who have the same category of coverage (i.e., self-only or family coverage). However, if an employer contributes to the HSAs of any employees covered by other HDHPs (i.e., HDHPs not offered through the employer), then "comparable participating employees" includes all employees who are eligible individuals.

The comparable contribution requirements apply separately to part-time and full-time employees. A part-time employee is any employee who is customarily employed for less than 30 hours a week. Also, the Health Opportunity and Patient Empowerment Act of 2006 amended the law to permit employers to make larger contributions to the HSAs of rank-and-file employees than to the HSAs of highly compensated employees (HCEs). The statute does not specify any other permitted distinctions among employees for comparable contribution testing purposes. Furthermore, Treasury regulations exempt certain collectively bargained employees from the comparable contribution rules.

The comparable contribution requirement is tested on a calendar year basis. A 35 percent excise tax is imposed on any employer that fails to make comparable contributions to employees' HSAs during a calendar year. The 35 percent excise tax applies to the employer's aggregate contributions to its employees' HSAs during the calendar year.

Summary of Final Regulations

As noted, the final regulations address two specific issues. First, the final regulations provide a way for employers to comply with the comparable contribution requirements with respect to employees who are eligible individuals but who have not established an HSA by December 31, as well as with respect to employees who may have established HSAs but have not notified the employer. Second, the final regulations clarify how employers can accelerate contributions to certain employees in need without violating the comparable contribution requirements.

The first situation is a real compliance conundrum for employers because they are required to make contributions to HSAs that do not exist, or at least that they do not know exist. The proposed comparable contribution regulations the IRS issued in 2005 provided simply that employers did not have to make comparable contributions to employees that have not established HSAs by December 31st. These final regulations require employers to do more.

Specifically, the final regulations require employers to notify these employees in writing, by January 15 of the following calendar year, that if they establish an HSA and notify the employer by the last day of February then they will receive a comparable contribution to their HSA. Then, for those employees who set up an HSA and notify the employer by the end of February deadline, the employer must contribute comparable amounts (taking into account each month that the employee was a comparable participating employee) plus reasonable interest. The employer can provide the notice electronically, in accordance with Treas. Reg. § 1.401(a)-21. Also, the final regulations include sample language employers can use in preparing their notices.

The final regulations include several examples of how these rules work, including the following.

Accelerated Employer Contributions

Employers that choose to contribute to their employees' HSAs are more likely to do so on a periodic basis -- such as monthly or quarterly -- than in a single contribution at the beginning or end of the year. This makes sense because there is no way to know exactly how much an employee can add to an HAS until the end of the year, and because employers may not want to make a full year contribution to the HSAs of employees who leave in the middle of the year. Furthermore, a one-time contribution at the end of the year is not good for employees who incur medical expenses throughout the year.

But there are problems with periodic contributions, too. At any given point in the year, it is possible employees will incur more in medical expenses than their employers have contributed thus far. In order to help employees in this situation, employers might want to accelerate their periodic contributions. However, can employers accelerate contributions for certain employees without violating the comparability rules?

The final regulations clarify that employers can make accelerated contributions to employees who at that point in time have incurred more qualifying medical expenses than the employer's cumulative HAS contributions. All comparable employees still must receive the same amount or the same percentage for the calendar year. However, the fact that employees who receive accelerated contributions and then terminate employment before the end of the year receive more contributions on a monthly basis than those who work the entire year will not result in a comparable contribution violation.

Additionally, "all accelerated contributions must be available throughout the calendar year on an equal and uniform basis to all ... eligible employees." Furthermore, "[e]mployers must establish reasonable uniform methods and requirements for accelerated contributions and the determination of medical expenses."

Effective Dates

The final regulations are effective on April 17, 2008, and apply to employer contributions made for calendar years beginning on or after January 1, 2009. However, employers can rely on the final regulations beginning immediately.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.