The short answer is YES. An employer’s cafeteria plan may auto-enroll HSA-eligible employees and set a default pretax HSA contribution amount (e.g., $X per pay period, X% of pay, the difference between the PPO and HDHP employee required contribution amount, etc.) unless the employee files an affirmative election not to contribute to the HSA. Similarly, if an employee is currently contributing to an HSA and enrolls in HDHP coverage for the upcoming plan year, a cafeteria plan may automatically continue the employee’s pretax HSA contribution at the current amount into the next plan year, unless the employee files an affirmative election to change or end HSA contributions. These types of automatic elections are sometimes called “negative” or “default” elections for new or initial pretax HSA contributions and "rolling," "evergreen," or “passive” HSA elections when carried over to the next plan year. While cafeteria plans can implement these types of automatic elections for pretax HSA contributions, IRS imposes certain conditions (see below for “IRS Notice Requirements”). In addition, see below for “ERISA Considerations” and ”State Wage Withholding Law Concerns” which may present other constraints. The ability to implement these types of automatic elections was confirmed in the IRS's August 2007 proposed cafeteria plan regulations.
In addition, IRS Notice 2004-50, Q&A-61 states the following regarding cafeteria plan “negative” (or automatic) HSA elections:
Q-61. Can employers provide negative elections for HSAs if offered through a cafeteria plan?
A-61. Yes. See Rev. Rul. 2002-27, 2002-1 C.B. 925.
Automatic elections (whether negative/default or rolling/evergreen/passive) can prove more challenging to use for pretax HSA contributions than for comprehensive medical plans (e.g., the underlying HSA-qualifying HDHP). Unlike the need for medical coverage, an employee’s HSA eligibility (or desired contribution level) often varies from year to year or even month to month. Just because an employee is enrolled in an HSA-qualifying HDHP does not necessarily mean the employee is HSA-eligible. For example, if an employee has other disqualifying coverage, such as Medicare or a spouse’s general-purpose health FSA, automatically initiating (or continuing) the employee’s pretax HSA contribution election would present problems. Similar issues arise even if an employer automatically establishes HSAs for employees by merely seeding accounts with employer dollars rather than employee pretax contributions. As a result, many employers hesitate to use automatic elections for HSAs, even though nothing in the cafeteria plan or HSA rules prohibits this practice.
IRS Notice Requirements
IRS rules impose notice requirements if an employer implements an automatic election for employee pretax HSA contributions. Before each plan year, the employer must give employees a notice that explains the choice to elect to receive either cash (i.e., declining pretax HSA contributions) or make pretax HSA contributions. Employers may provide this notice in new-hire packets and annual-enrollment materials.
The notice should contain the following information:
Details about the automatic pretax HSA contribution election process and the employee's right to decline pretax HSA contributions (i.e., receive cash)
The default pretax HSA contribution amount, if any (e.g., $500, $1,000)
The procedures for exercising the right to decline pretax HSA contributions
The time by which an election to override the automatic election must be made
The period for which the election will be effective
For a plan with rolling/evergreen/passive elections, a description of the employee's existing pretax HSA contribution amount, if applicable
So, while the IRS confirms that a cafeteria plan may provide for automatic elections into certain benefits (including HSA pre-tax contributions), the IRS conditions such elections on the employer providing a required notice to employees – specifically, new hires must be notified of their ability to override an automatic election; likewise current employees/participants must be notified annually of their ability to override an automatic/negative/default or rolling/evergreen/passive election.
ERISA Considerations
The US Department of Labor (DOL) has provided guidance (Field Assistance Bulletins 2006-02 and 2004-1) outlining conditions for keeping HSAs exempt from ERISA. One of those conditions is that an employee’s HSA participation must be “completely voluntary”. This requirement raised concerns whether an automatic pretax HSA contribution election process (whether negative/default or rolling/evergreen/passive) will inadvertently cause the HSA to be considered an ERISA-covered plan. Under the 2006 DOL guidance, an employer may unilaterally open an HSA for an employee and deposit employer funds into the HSA without causing the arrangement to be subject to ERISA, as long as other conditions for exemption are met. In addition, as long as an employer adheres to the IRS's automatic election procedures for cafeteria plans (described above), DOL seems likely to view automatic pretax HSA contribution elections as sufficiently "voluntary" for ERISA exemption. Unfortunately, DOL guidance does not directly address this point, so employers should vet this issue with their legal counsel.
Q-1. In the absence of an employee’s affirmative consent, may an employer open an HSA for an employee and deposit employer funds into the HSA without violating the condition in the FAB that requires that the establishment of an HSA by an employee be “completely voluntary”?
A-1. Yes. The intended purpose of the “completely voluntary” condition in FAB 2004-01 is to ensure that any contributions an employee makes to an HSA, including salary reduction amounts, will be voluntary. HSA accountholders have sole control and are exclusively responsible for expending HSA funds and generally may move the funds to another HSA or otherwise withdraw the funds. The fact that an employer unilaterally opens an HSA for an employee and deposits employer funds into the HSA does not divest the HSA accountholder of this control and responsibility and, therefore, would not give rise to an ERISA-covered plan so long as the conditions described in FAB 2004-01 are met. (emphasis added)
State Wage Withholding Law Concern
Employers should also consult legal counsel to determine whether any state wage-withholding laws could restrict automatic pretax HSA contribution elections. Some state laws require an employer to get an employee’s written authorization before withholding any amounts from pay, unless legally required to do so (by law or court order). While ERISA pre-emption may prevent these state laws from affecting auto-enrollment in ERISA covered employee benefit plans, HSAs generally are not considered ERISA plans.
I hope this is helpful.
