IRS Expands Categories---Final HSA Comparability Rules

The Internal Revenue Service has released final regulations for making comparable contributions to health savings accounts (HSAs). These rules amend and finalize proposed rules issued in August 2005. The final regulations appeared in the July 31 Federal Register.

Under IRC Sec. 4980G if an employer fails to make comparable contributions to the HSAs of its employees during a calendar year, an excise tax equal to 35% of the aggregate amount contributed by the employer to the HSAs of its employees during that calendar year is imposed on the employer. The final regulations, in the form of 36 questions and answers, provide guidance in the following five areas:

Failure of employer to make comparable HSA contributions (general rules, categories of coverage);
Definition of employer contribution;
Definition of employee for comparability testing (comparability categories, rules);
Calculating comparable contributions; and
HSA comparability rules and IRC Sec. 125 cafeteria plans and waiver of excise tax.

The final regulations apply to employer contributions to HSAs made on or after Jan. 1, 2007.

Major Changes From Proposed Rules

The final rules make the following changes to the August 2005 proposed regulations:

Additional categories of coverage. The final regulations allow family high-deductible health plan (HDHP) coverage to be subdivided into the following additional categories of HDHP coverage: self plus one, self plus two and self plus three or more. The proposed rules only had two categories: self only and family.

In addition, the final regulations provide that an employer's contribution with respect to the self plus two category may not be less than the employer's contribution with respect to the self plus one category, and the employer's contribution with respect to the self plus three or more category may not be less than the employer's contribution with respect to the self plus two category.

Collectively bargained employees. The final regulations provide that employees in collective bargaining units are not comparable participating employees, if health benefits were the subject of good faith bargaining. Collectively bargained employees are, therefore, disregarded for purposes of the comparability rules.

Contributions through a cafeteria plan. The final regulations provide additional guidance on how employer HSA contributions may be made through a cafeteria plan.

Specifically, the final regulations provide that employer contributions to employees' HSAs can be made through a Sec. 125 cafeteria plan and are subject to the Sec. 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 pretax salary reduction amounts), regardless of whether an employee actually elects to contribute any amount to the HSA by salary reduction.

For example, if a cafeteria plan permits employees to elect to make pretax salary reduction contributions to their HSAs and the employer automatically contributes a non-elective matching contribution or “seed money” to the HSA of each employee who makes a pretax HSA contribution, then the cafeteria plan nondiscrimination rules and not the comparability rules apply to the employer's HSA contributions because the HSA contributions are made through the cafeteria plan.

Locating former employees. Regarding what actions an employer must take to locate any missing comparable participating former employees for purposes of contributions on behalf of eligible former employees, the final regulations explain that an employer making comparable contributions to former employees must take "reasonable actions" to locate any missing comparable participating former employees. In general, such reasonable actions include the use of certified mail, the IRS's letter forwarding program, or the Social Security Administration's letter forwarding service.

If an employer funds HSAs before some employees establish HSAs for the year, the employer is expected to make comparable contributions plus "reasonable interest" for these employees. The final regulations provide that the determination of whether a rate of interest used by an employer is reasonable will be based on all of the facts and circumstances. However, the federal short-term rate as determined by the IRS in accordance with IRC Sec. 1274(d) will be considered a reasonable interest rate, according to the final rules.

Reprinted with permission. © CCH

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