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Introduction
On July 28, 2006, the IRS released the final regulations under Code
Section 4980G (54.4980G-1,-2,-3, -4 and -5. These regulations provide
guidance on employer contributions to employees' HSAs. The IRS had
released proposed regulations on August 25, 2005. The final regulations
apply to employer contributions made on or after January 1, 2007.
The following provides a short review of the requirements and the
changes provided in the new final regulations.
A Short Review
If an employer makes contributions to employees' HSAs, the employer
must make available comparable contributions (e.g. same amount or
the same percentage of deductible) on behalf of all employees with
comparable coverage during the same period (e.g. single/family),
as provided in Proposed IRS Regulations Section 54.4980G-1, Q/A-1.
The testing period is the calendar year for all contributions, as
provided in Proposed Regulations Section 54.4980G-1, Q/A-3.
Contributions to independent contractors, sole proprietors and partners
in a partnership are not taken into account under the comparability
rules, as provided in Proposed IRS Regulations Section 54.4980G-3,
Q/A-2.
An employer's matching contributions to a cafeteria plan are not
subject to the comparability rule. These contributions are subject
to the cafeteria nondiscrimination rules, as provided in Proposed
IRS Regulations Section 54.4980G-5, Q/A-2.
The comparability rule may apply separately to part-time employees
(i.e., employees who are customarily employed for fewer than 30 hours
per week) and former employees, as provided in Proposed IRS Regulations
Section 54.4980G-3, Q/A-5. This comparability rule does not apply
separately to groups of collectively bargaining employees. The comparability
rule does not apply to amounts transferred from an employee's HSA
or MSA.
If an employer has some employees work full-time during the entire
calendar year and other employees work full-time for less than the
entire calendar year, it meets the comparability rules if the contribution
amount is comparable when determined on a month-to-month basis, as
provided in Proposed IRS Regulations Section 54.4980G-4, Q/A-2.
The employer is not required to make contributions to any current
or former employees who are participating in an HDHP not sponsored
by the employer. If an employer does make contributions for all eligible
current or former employees whether or not covered under the employer's
HDHP, it then must make comparable contributions to all eligible
current or former employees participating in any HDHP, whether or
not sponsored by the employer as provided in Proposed IRS Regulations
Section 54.4980G-3, Q/A-6, Q/A-7 and Q/A-10.
An employer must establish a consistent policy for making its comparable
HSA contributions to employees' HSAs during the calendar year. If
it makes HSA contributions for one employee at the beginning of the
calendar year, it must make contributions at the same time for all
other eligible employees as provided in Proposed IRS Regulations
Section 54.4980G-4, Q/A-5.
If an employee has not established an HSA at the time the employer
funds its employees' HSAs, the employer complies with the comparability
rules by contributing comparable amounts to the employee's HSA
when the employee establishes the HSA, taking into account each
month that the employee was a comparable participating employee.
An employer is not required to make comparable contributions
for a calendar year to an employee's HSA if the employee has
not established an HSA by December 31st of the calendar year
as provided in Proposed IRS Regulations Section 54.4980G-4, Q/A-6.
Unless indicated below, all of the above requirements are provided
in the final regulations.
Changes in the Final Regulations
Individual and Family Coverage: Under Proposed IRS Regulation Section
54.4980G-1, Q/A-2, categories of comparable coverage were divided
between individual and family coverage only. Under Final IRS Regulation
Section 54.4980G-1, Q/A-2, the IRS has subdivided family coverage
into additional categories of family HDHP coverage, self plus one,
self plus two and self plus three or more. An employer may contribute
different amounts for each of these new categories of coverage,
but its contribution for the self plus one category and its contribution
with respect to self plus three or more category may not be less
than its contribution with respect to the self plus two category.
Example: An employer maintains and contributes to the HSAs of eligible
employees who elect coverage under the HDHP. The HDHP has the following
coverage options: self-only, self plus one, self plus two and self
plus three or more.
The employer contributes $500 to the HSA of each eligible employee
with self-only HDHP coverage, $750 to the HSA of each eligible
employee with self plus on HDHP coverage, $900 to the HSA of each
eligible employee with self plus two HDHP coverage and $1,000 to
the HSA of each eligible employee with self plus three or more
HDHP coverage. The Employer's contributions satisfy the comparability
rules.
Collectively Bargained Employees: Under Proposed Regulations 54.4980G-3,
Q/A-5, the comparability rules did not apply separately to collectively
bargained and non-collectively bargained employees. Similarly,
the comparability rules do not apply separately to groups of collectively
bargained employees. Under Final IRS Regulations Section 54.4980G-3,
Q/A-6, the IRS changed their position and indicated that collectively
bargained employees who are covered by a bona fide collectively
bargained agreement between employee representative and one or
more employers are not comparable participating employees, if health
benefits were the subject of good faith bargaining between such
employee representatives and such employer or employers. Former
employees covered by a collective bargaining agreement also are
not comparable participating employees.
Example: An employer offers its employees an HDHP with a $1,500
deductible for self-only coverage. It has collectively bargained
and non-collectively bargained employees. The collectively bargained
employees are covered by a collectively bargained agreement under
which health benefits were bargained in good faith. For 2007, the
employer contributes $500 to the HSAs of all eligible non-collectively
bargained employees with self-only coverage under its HDHP. The
employer does not contribute to the HSAs of the collectively bargained
employees. The employer's contribution to the HSAs of non-collectively
bargained employees satisfy the comparability rules. The comparability
rules do not apply to its collectively bargained employees.
Locating Former Employees: Final IRS Regulations Section 54.4980-2,
Q/A-10 provides that if an employer is making contributions to
former employees, it must take reasonable actions to locate any
missing comparable former employees. These reasonable efforts include
the use of certified mail, the Internal Revenue Service Letter
Forwarding Program or the Social Security Administration Letter
Forwarding Service.
HSA Contributions made through a Cafeteria
Plan: Final IRS Regulations
Section 54.4980-5, Q/A-1 provides that HSA contributions made through
a cafeteria plan will not be subject to the comparability rules
if such contributions are made under a written cafeteria plan,
the employees have the right 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 HSAs by salary reduction.
This means that the employer must amend its cafeteria plan to provide
the HSA contributions; the HSA contributions made by the employees
must be voluntary but may be provided through a negative election.
Establishment Rule: The IRS has removed and reserved the rule provided
in the Final IRS Regulations Section 54.4980G-4, Q/A-6 that required
an employee to establish an HSA account by December 31 to receive
an employer contribution.
Providing Interest if HSA is not established at the time the Employer
funds its Employees' HSAs: Final IRS Regulations 54.4980-4, Q/A-6
provides that if an employee has not established an HSA at the
time the employer funds its employees' HSA, the employer complies
with the comparability rules by contributing comparable amounts
plus reasonable interest to the employees' HSA when the employee
establishes the HSA, taking into account each month that the employee
was a comparable participating employee. Final IRS regulations
Section 54.4980-4, Q/A-13 provides that the determination of whether
a rate of interest used by an employer is reasonable is based on
all of the facts and circumstances. If an employer calculates interest
using the Federal short-term rate as determined by the IRS, it
will be deemed by the IRS to be a reasonable interest rate.”
The final regulations are published at
http://www.treas.gov/press/releases/reports/hsa_comparable_contributions_4830.pdf.
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