IRS Proposes Guidance on Employer HSA Comparable Contributions

June 11, 2007

On June 1, 2007, the IRS issued proposed regulations providing guidance on how an employer can make comparable contributions to their eligible employees' HSAs in two specific situations:

• When an employee has not established an HSA or notified the employer that an HSA was established by December 31
• When medical expenses exceed the employer’s year-to-date contributions

These proposed regulations are intended to amend the final comparability regulations that the IRS issued in 2006. Employers may rely on them until the final regulations are issued. Please note that these proposed regulations do not apply to HSA contributions made through a cafeteria plan. Such contributions occur when employers allow employees to make pre-tax HSA contributions from their paychecks. Contributions made through a cafeteria plan are subject to cafeteria plan nondiscrimination rules but not the HSA comparability rules.

Employee has not established HSA by December 31
One difficulty in providing comparable contributions is when employees do not open an HSA by December 31 or fail to notify the employer they have done so. In such cases, the employer must provide written notice to each eligible employee without an HSA no later than the next January 15, stating that each eligible employee who both establishes an HSA and notifies the employer of this fact by the last day of February will receive a comparable contribution to the HSA. The notice may be sent electronically. The regulations include a model notice that employers may use.

The employer must make comparable contributions (plus reasonable interest) by April 15. The 2006 Final Comparability Regulations defined a reasonable rate of interest as "the Federal short-term rate as determined by the Secretary [of Treasury]."

Acceleration of employer contributions
The proposed regulations allow employers to accelerate part or all of their contributions for any calendar year to the HSAs of the eligible employee who has incurred qualified medical expenses during that year and have exceeded the employer's year-to-date HSA contribution. Accelerated contributions must be on an equal and uniform basis for all eligible employees throughout the calendar year. Employers need not worry about comparability related to midyear employment terminations.

Notice 2004-50 provided employers with the ability to accelerate contributions made through a cafeteria plan.

The IRS has requested written comments by August 30, 2007, in advance of a public hearing on September 27, 2007. The Compliance Department is reviewing these regulations to determine whether to comment or appear at the hearing on behalf of its clients.

A copy of the Proposed Regulations is available at www.infinisource.net under HSA.