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105(h) - Health Savings Accounts


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A question that I have been asked a number of times since creation of health savings accounts (HSAs) is whether it is permissible for an employer with a self-insured health plan to set up higher deductible levels for certain of its executives and a lower deductible for other employees. The idea is that by limiting enrollment in the high-dedecutible portion of the health plan to highly-compensated employees, the employer can also limit its HSA contributions to the same group of executives.

On its face, I see no discrimination problems under the HSA rules. Notice 2004-50 provides that contributions to HSAs must be comparable only as to those employees who are eligible for an HSA. Because in the scenario described the non-HCEs would not be allowed to enroll in a high-deductible health plan, they would not be eligible to receive HSA contributions and therefore would not be in the class of eligible employees for testing HSA comparability. Because HSAs are not employer reimbursements, they are are not subject to Section 105(h) discrimination testing.

As for the health plan, under Section 105(h) a self insured plan may not discriminate in favor of HCEs with respect to eligiblity or benefits. The argument from employers though is that, when the health plan is viewed in isolation, separate from the HSA contributions, the HCEs are actually getting less benefits than other employees because the same items are covered by the health plan, yet the HCEs' deductible is higher. While 105(h) also has a facts and circumstances "discriminatory in operation" test, this too is geared towards ensuring that "the plan" is not actually discrimating. For example, prohibited discrimination may occur where the duration of a particular benefit coincides with the period during which a highly compensated individual utilizes the benefit. Since the plan consists only of the self-insured plan, and not the HSA, it could be argued that there is no discrimination in operation either.

Has anybody else had a chance to address this issue?

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You pose an interesting premise, particularly on the part where all have the same benefits, except HCEs have larger deductibles, and thus, lower benefits. To discriminate against HCEs is acceptable discrimination.

But, the case is not as clear cut, for you seem to imply that all HSA contribitions are made by the employees, and in this case, all HCEs. I think one could make a case this may be discriminatory, in that one could contribute over $10,000 per year, if he had a family. Of course, if this was set up, although the HCE may indeed have over $20,000 in his HSA at the end of the second year, his deductible would be around $10,500 (depending on the inflation index). In that scenario, even if the employer agreed to cover the first $10,500 of non HCEs expenses, the HCEs would still have (if family coverage, with the highest deductible) over $20,000 in a tax-advantaged account, of which non HCEs would have zero.

Aside from the discussion about HSAs, what are you actually trying to accomplish?

Don Levit

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