HSA/Cafeteria Plan Design Question

HSA/Cafeteria Plan Design Question - Company currently has a HDHP and HSA for all employees after 90 days (company contributes max amount each year -- very $ to them with employee population of lower paid hourly getting medical benefits often exceeding their pay).  Company wishes to change to funding HSA through a cafeteria plan.  Then,  no comparability testing of HSA and only 125 testing applies.  At the same time, Company wants to narrow eligibility to apply a year lookback period to limit plan participation to full-time employees (those with on average 130 hours per month over a 12-month measurement period).  Is this ok?

Still ok if in addition, different contribution bands are established for hourly and salaried employees?

Thank you!

Wow, very generous employer.

To move the Section 125 nondiscrimination rules they'll have to a) allow employees to contribute pre-tax, or b) make the employer contribution a cashable flex credit.  The former is not going to be an option if they're maxing out the limit with employer contributions.  So they'll have to make the employer contribution a cashable flex credit if they want to keep the full employer contribution up to the limit.

• More details: https://www.newfront.com/blog/employer-hsa-contributions

If they do that, I see no issue with the eligibility requirement based on ACA LBMM full-time status.

• More details: https://www.newfront.com/blog/the-aca-look-back-measurement-method

As for different contribution bands based on hourly vs. salaried, I view that as not permitted by the Section 125 NDT rules--the uniform election rule specifically--assuming they're going to be more generous to the salaried class.  That would result in higher ER HSA contributions to salaried HCPs who are enrolled in the same HDHP as the hourly non-HCPs.

• More details: https://www.newfront.com/blog/designing-health-plans-with-different-strategies

Here's the relevant cites:

Treas. Reg. §54.4980G-5:

Q-1. If an employer makes contributions through a section 125 cafeteria plan to the HSA of each employee who is an eligible individual, are the contributions subject to the comparability rules?

A-1. (a) In general. No. The comparability rules do not apply to HSA contributions that an employer makes through a section 125 cafeteria plan. However, contributions to an HSA made through a cafeteria plan are subject to the section 125 nondiscrimination rules (eligibility rules, contributions and benefits tests and key employee concentration tests). See section 125(b), (c) and (g) and the regulations thereunder.

(b) Contributions made through a section 125 cafeteria plan. Employer contributions to employees’ HSAs are made through a section 125 cafeteria plan and are subject to the section 125 cafeteria plan nondiscrimination rules and not the comparability rules if under the written cafeteria plan, the employees have the right to elect to receive cash or other taxable benefits in lieu of all or a portion of an HSA contribution (meaning that all or a portion of the HSA contributions are available as pre-tax salary reduction amounts), regardless of whether an employee actually elects to contribute any amount to the HSA by salary reduction.

Prop. Treas. Reg. §1.125-7(c)(2):

(2) Benefit availability and benefit election. A cafeteria plan does not discriminate with respect to contributions and benefits if either qualified benefits and total benefits, or employer contributions allocable to statutory nontaxable benefits and employer contributions allocable to total benefits, do not discriminate in favor of highly compensated participants. A cafeteria plan must satisfy this paragraph (c) with respect to both benefit availability and benefit utilization. Thus, a plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect permitted taxable benefits)…A plan must also give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect to receive employer contributions as permitted taxable benefits).

Prop. Treas. Reg. §1.125-7(e)(2):

(2) Similarly situated. In determining which participants are similarly situated, reasonable differences in plan benefits may be taken into account (for example, variations in plan benefits offered to employees working in different geographical locations or to employees with family coverage versus employee-only coverage).

Slide summary:

• 2025 Newfront Go All the Way with HSA Guide

• 2025 Newfront Section 125 Cafeteria Plans Guide

Brian, do you also agree that ER HSA contributions can vary by Individual and Family class, plus also allowed with no contribution to Individual coverage QHDHP coverage EE HSA, while contributing to Family Coverage EE HSA, However, the contribution with respect to the self plus two category may not be less than the contribution with respect to the self plus one category and the contribution with respect to the self plus three or more category may not be less than the contribution with respect to the self plus two category?

Cornell Law School https://www.law.cornell.edu/cfr/text/26/54.4980G-1 - § 54.4980G-1 Failure of employer to make comparable health savings account contributions.

 See Q & A-1 in § 54.4980G-4 for the definition of comparable contributions. Thus, the categories of “employee plus spouse” and “employee plus dependent,” each providing coverage for two individuals, are treated as the single category “self plus one” for comparability purposes. See, however, the final sentence of paragraph (a) of Q & A-1 of § 54.4980G-4 for a special rule that applies if different amounts are contributed for different categories of family coverage.

§54.4980G-4 Calculating comparable contributions.

Q-1: What are comparable contributions?

A-1: (a) Definition. Contributions are comparable if, for each month in a calendar year, the contributions are either the same amount or the same percentage of the deductible under the HDHP for employees who are eligible individuals with the same category of coverage on the first day of that month. Employees with self-only HDHP coverage are tested separately from employees with family HDHP coverage. Similarly, employees with different categories of family HDHP coverage may be tested separately. See Q & A-2 in §54.4980G-1. An employer is not required to contribute the same amount or the same percentage of the deductible for employees who are eligible individuals with one category of HDHP coverage that it contributes for employees who are eligible individuals with a different category of HDHP coverage. For example, an employer that satisfies the comparability rules by contributing the same amount to the HSAs of all employees who are eligible individuals with family HDHP coverage is not required to contribute any amount to the HSAs of employees who are eligible individuals with self-only HDHP coverage, or to contribute the same percentage of the self-only HDHP deductible as the amount contributed with respect to family HDHP coverage. However, the contribution with respect to the self plus two category may not be less than the contribution with respect to the self plus one category and the contribution with respect to the self plus three or more category may not be less than the contribution with respect to the self plus two category.

(b) Examples. The following examples illustrate the rules in paragraph (a) of this Q & A-1. None of the employees in the following examples are covered by a collective bargaining agreement. The examples read as follows:

Example 1. In the 2007 calendar year, Employer A offers its full-time employees three health plans, including an HDHP with self-only coverage and a $2,000 deductible. Employer A contributes $1,000 for the calendar year to the HSA of each employee who is an eligible individual electing the self-only HDHP coverage. Employer A makes no HSA contributions for employees with family HDHP coverage or for employees who do not elect the employer’s self-only HDHP. Employer A’s HSA contributions satisfy the comparability rules.

Thanks, Scott A. Davis

Those are the comparability rules, which are essentially irrelevant.  They apply only where an employer does not allow employee pre-tax HSA contributions through the cafeteria plan.  Since basically every employer making contributions also allows employee pre-tax HSA contributions, the comparability rules were just a big waste of Treasury time/paper.

Instead, virtually all employers follow the Section 125 nondiscrimination rules.  Those are much easier to satisfy.  The main limitation is the uniform election rule described above.