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Guest Article

(From the August 7, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues Final Regulations on HSA Comparable Contribution Rules

The Internal Revenue Service (IRS) has issued final regulations on the comparable contribution requirements for employer contributions to health savings accounts (HSAs). 71 FR 43056 (July 31, 2006). The final regulations are substantially similar to the proposed regulations the IRS issued last year. However, unlike the proposed regulations, the final regulations permit employers to disregard certain collectively bargained employees for purposes of the comparable contribution requirements, and generally provide more flexibility.

The final regulations are effective July 31, 2006, and apply to employer HSA contributions made on or after January 1, 2007.

Background

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" 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).

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. The statute does not specify any other permitted distinctions among employees for comparable contribution testing purposes. However, as noted below, the final regulations do permit distinctions between certain collectively bargained employees and non-collectively bargained employees.

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. The final regulations provide the following example of how the excise tax is computed:

Example. During the 2007 calendar year, Employer D has 8 employees who are eligible individuals with self-only coverage under an HDHP provided by Employer D. The deductible for the HDHP is $2,000. For the 2007 calendar year, Employer D contributes $2,000 each to the HSAs of two employees and $1,000 each to the HSAs of the other six employees, for total HSA contributions of $10,000. Employer D's contributions do not satisfy the comparability rules. Therefore, Employer D is subject to an excise tax of $3,500 (35% of $10,000) for its failure to make comparable contributions to its employees' HSAs.

Exception for Certain Collectively Bargained Employees

Perhaps the most significant difference between the proposed and final regulations is that the final regulations permit employers to make different HSA contributions for certain collectively bargained employees than for non-collectively bargained employees. Specifically, employees covered by a bona fide collective bargaining agreement are not comparable participating employees if health benefits were the subject of good faith bargaining. As a result, employers can disregard these employees for purposes of the comparable contribution requirement.

The final regulations illustrate this point with a series of examples, including the following:

Example 1. Employer A offers its employees an HDHP with a $1,500 deductible for self-only coverage. Employer A has collectively bargained and non-collectively bargained employees. The collectively bargained employees are covered by a collective bargaining agreement under which health benefits were bargained in good faith. In the 2007 calendar year, Employer A contributes $500 to the HSAs of all eligible non-collectively bargained employees with self-only coverage under Employer A's HDHP. Employer A does not contribute to the HSAs of the collectively bargained employees. Employer A's contributions to the HSAs of non-collectively bargained employees satisfy the comparability rules. The comparability rules do not apply to collectively bargained employees.
Example 4. Employer D has a unit of collectively bargained employees that are covered by a collective bargaining agreement under which health benefits were bargained in good faith. In accordance with the terms of the collective bargaining agreement, Employer D contributes an amount equal to a specified number of cents per hour for each hour worked to the HSAs of all eligible collectively bargained employees. Employer D's contributions to the HSAs of collectively bargained employees are not subject to the comparability rules because the comparability rules do not apply to collectively bargained employees.

This latter example is significant because it illustrates the extent of the final regulations' collective bargaining exception. In addition to making it possible for employers to make different HSA contributions on behalf of certain collectively bargained employees than it makes on behalf of non-collectively bargained employees, the exception enables employers to treat employees within the group of non-collectively bargained employees differently. Employers generally may not base HSA contributions on hours worked unless all employees worked the same number of hours. Otherwise, employees would end up with different employer contributions. However, the employer in the example can use this contribution formula because the final regulations because the comparability rules do not apply to these collectively bargained employees.

Categories of Family Coverage

Another difference between the proposed and final regulations is that the final regulations permit employers to create three subcategories of family coverage for purposes of applying the comparable contribution requirement. The subcategories are:

Self plus one;
Self plus two; and
Self plus three or more.

This means, in addition to being able to make different HSA contributions on behalf of employees with single coverage and family coverage, employers also can make different HSA contributions to employees with different types of family coverage. However, an employer's

HSA contribution on behalf of employees with self plus one coverage may not be greater than its contribution on behalf of employees with self plus two coverage. Likewise, an employers' HSA contribution on behalf of employees with self plus two coverage may not be greater than its contribution on behalf of employees with self plus three or more coverage. The final regulations illustrate this rule with the following example:

Example 3. (i) Employer C maintains an HDHP and contributes to the HSAs of eligible employees who elect coverage under the HDHP. The HDHP has the following coverage options:
Self-only;
Self plus one;
Self plus two; and
Self plus three or more.

(ii) Employer C contributes $500 to the HSA of each eligible employee with self-only HDHP coverage, $750 to the HSA of each eligible employee with self plus one HDHP coverage, $900 to the HSA of each eligible employee with self plus two HDHP coverage and $1,000 to the HSA of each eligible employee with self plus three or more HDHP coverage. Employer C's contributions satisfy the comparability rules.

In some cases plans may use different terminology, such as "self plus spouse," "self plus dependent," "self plus spouse plus one dependent," etc. The final regulations provide all categories that provide coverage for the same number of individuals are a single category for purposes of applying the comparability rules. For example, "self plus spouse plus one dependent" and "self plus two dependents" are both within the "self plus two" category.

Former Employees

Employers also may make HSA contributions on behalf of former employees. According to the final regulations the comparable contribution requirements apply to former employees, but they are a separate category of employees for comparable contribution testing purposes. This means employers who make contributions on behalf of former employees must make comparable contributions on behalf of all comparable participating former employees; however, employers can make different contributions on behalf of active employees than they make on behalf of former employees.

In some cases employers might have problems meeting the comparable contribution requirement with respect to former employees because it cannot locate all comparable participating former employees. For these situations, the final regulations provide employers "must take reasonable actions to locate any missing comparable participating former employees." This includes using certified mail, the IRS's Letter Forwarding Program or the Social Security Administration's Letter Forwarding Service.

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, Taina Edlund 202.879.4956, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.