Contribution to Former Employee

[Chaz]

As part of a severance arrangement, can an employer make HSA contributions for and in 2010 and 2011 to a former employee who terminates employment in 2009? If so, are there any unique issues that the employer should be aware of (other than whether the employee remains otherwise HSA-eligible)?

[J Simmons]

Treas Reg § 54.4980G-3, Q&A-10:

Q-10: If an employer contributes to the HSAs of former employees who are eligible individuals, do the comparability rules apply to these contributions?

A-10: (a) Former employees. Yes. The comparability rules apply to contributions an employer makes to former employees' HSAs. Therefore, if an employer contributes to any former employee's HSA, it must make comparable contributions to the HSAs of all comparable participating former employees (former employees who are eligible individuals with the same category of HDHP coverage). However, an employer is not required to make comparable contributions to the HSAs of former employees with coverage under the employer's HDHP because of an election under a COBRA continuation provision (as defined in section 9832(d)(1)). See Q & A-5 and Q & A-12 of this section. The comparability rules apply separately to former employees because they are a separate category of covered employee. See Q & A-5 of this section. Also, former employees who were covered by a collective bargaining agreement immediately before termination of employment are not comparable participating employees. See Q & A-6 of this section.

(b) Locating former employees. An employer making comparable contributions to former employees must take reasonable actions to locate any missing comparable participating former employees. In general, such actions include the use of certified mail, the Internal Revenue Service Letter Forwarding Program or the Social Security Administration's Letter Forwarding Service.

© Examples. The following examples illustrate the rules in paragraph (a) of this Q & A-10. None of the employees in the following examples are covered by a collective bargaining agreement. The examples read as follows:

Example 1. In a calendar year, Employer N contributes $1,000 for the calendar year to the HSA of each current employee who is an eligible individual with coverage under any HDHP. Employer N does not contribute to the HSA of any former employee who is an eligible individual. Employer N's contributions satisfy the comparability rules.

Example 2. In a calendar year, Employer O contributes to the HSAs of current employees and former employees who are eligible individuals covered under any HDHP. Employer O contributes $750 to the HSA of each current employee with self-only HDHP coverage and $1,000 to the HSA of each current employee with family HDHP coverage. Employer O also contributes $300 to the HSA of each former employee with self-only HDHP coverage and $400 to the HSA of each former employee with family HDHP coverage. Employer O's contributions satisfy the comparability rules.

[Guest Sieve]

John --

Any 409A issues?

[J Simmons]

409A? Oh, yea. But for a 2009 separation from employment, HSA contributions in 2010 and 2011 might not be a deferral of compensation for 409A purposes. See Treas Reg § 1.409A-1(b)(9)(iv) and (v).

[Guest Sieve]

John --

I see the exception from 409A for deductible medical expense reimbursements (Treas. Reg. Section 1.409A-1(b)(9)(v)(B)) during the COBRA continuation period. I don't have a handle on all the nuances of 409A, but since an HSA is not a deductible medical expense under IRC Section 213--it's deductible under Section 223--how does it fit under the -1(b)(9)(v)(B) exception as part of a separation pay plan? (It seems that it would fit the "fixed schedule" rule of -2(i)(1)(iv), but that rule doesn't apply to separation pay plans.)

[J Simmons]

I don't have a handle on all the nuances of 409A, ...

Who does?

... since an HSA is not a deductible medical expense under IRC Section 213--it's deductible under Section 223--how does it fit under the -1(b)(9)(v)(B) exception as part of a separation pay plan?

My reference to -1(b)(9)(v) was not to -1(b)(9)(v)(B) but to -1(b)(9)(v)(D) and (E) as a possibility, in addition to -1(b)(9)(iv). The HSA contributions clearly could not be under -1(b)(9)(v)(B) as those contributions are not 213 expenses.

(It seems that it would fit the "fixed schedule" rule of -2(i)(1)(iv), but that rule doesn't apply to separation pay plans.)

Maybe you are more 409A nuanced than you're willing to admit.

[Guest Sieve]

OK, John. -1(b)(9)(v)(D) and (E) makes sense (to the extent any of the 409A regs can make sense). Thanks for the clarification--and sorry for the sidetrack discussion.

[GBurns]

Sometimes sidetrack discussions can be very helpful. In this case, it caused me think about and actually go read the cites et seq which in turn led me be able to clarify an issue for which I needed a response which had been eluding me.

[J Simmons]

Sometimes sidetrack discussions can be very helpful. In this case, it caused me think about and actually go read the cites et seq which in turn led me be able to clarify an issue for which I needed a response which had been eluding me.

I second GBurns comment, and do not even think the 409A issue was a sidetrack. Chaz in the OP asked two questions, one was whether HSA contributions could be made to a former employee in 2010 and 2011 who terminated in 2009. The second one asked for any unique issues that the employer should be aware of. Sieve's raising 409A was a good service to Chaz, and responsive to his OP.

[jpod]

With the exception of the FICA tax savings on money contributed directly to an HSA, is there any reason for the employer to get involved in that? Why not give the employee more cash severance and let the employee contribute or not contribute? Is there some reason I'm missing besides saving 7.65% on roughly $6,000 (or 1.45% if the employee is already above the SS wage base with other severance)?

[GBurns]

I also wonder why any employer would want to get involved in this sort of arrangement. How and at what cost will the employer ensure continued HSA eligiblity ?

I doubt that there will be any FICA savings since the payments would not be going through the payroll system.

Woouldn't it be easier to do a MERP and reimburse the eligible expenses as they occur ?

[MARYMM]

I also wonder why any employer would want to get involved in this sort of arrangement. How and at what cost will the employer ensure continued HSA eligiblity ?

I doubt that there will be any FICA savings since the payments would not be going through the payroll system.

Woouldn't it be easier to do a MERP and reimburse the eligible expenses as they occur ?

My employer just started doing this for a group of employees whose positions were eliminated last month. It was also done for what was, as far as I know, a mutually agreed upon separation with a severance agreement executed.

In our case, we ensure continued HSA elgibility based on the former employee's participation in the HDHP via COBRA

George is correct - there is no FICA savings.

Our HSA contributions are made thru a Sec 125 plan, so am I correct that the comparability provision does not apply? Can HR pick and chose to whom they will make the employer HSA contributions ?

[J Simmons]

The comparability provision does not apply to contributions to an HSA made as a cafeteria plan election by the EE. If the ER is giving cafeteria credits that the EEs may choose to be contributed to an HSA (or apply to pay for other selected benefits or take as extra cash), there are nondiscrimination rules that would make picking and choosing difficult if it favors any who are highly compensated EEs.