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On July 31, 2006, IRS published Final Regulations in the Federal Register
that provide further guidance regarding employer comparable contributions to
Health Savings Accounts (HSAs). In general, these rules represent good news for
employers who are seeking more flexibility in encouraging greater employee
participation and investment in HSAs.
IRS issued Proposed Regulations on this subject in August 2005. Infinisource was one of a few organizations that testified at an IRS hearing on these regulations in February 2006. (See our article at www.benefitsolved.com/news/stories/newsroom20060314-3.asp). IRS adopted several of our recommendations in making the final regulations clearer and more workable. The Final Regulations become effective for employer contributions made to HSAs on or after January 1, 2007.
Here is an overview of the significant changes from the proposed rules:
- While an employer is not required to contribute to employees’ HSAs, its contributions must be comparable (i.e., the same amount or same percentage of the deductible). IRS expanded the categories of coverage that may be compared under the corresponding high deductible health plan (HDHP). Under the proposed regulations, only two categories were permissible: self-only and family coverage. The Final Regulations allow family HDHP coverage to be subdivided into the following additional categories: self plus one, self plus two and self plus three or more. To clarify, an employer with both employee-spouse and employee plus one dependent HDHP coverage categories both count as self plus one for purposes of making HSA contributions.
- Regarding the new family coverage categories, an employer’s contribution for the self plus two category may not be less than the employer’s contribution for the self plus one category. Likewise, the employer’s contribution for the self plus three or more category may not be less than the self plus two category.
- The Final Regulations also exempt employer HSA contributions for employees coverage by a collective bargaining agreement if health benefits were the subject of good faith bargaining. Thus, employers are not required to contribute to the HSAs of union employees if they do so for non-union employees.
- Perhaps most importantly, IRS clarified when employer contributions are made through a section 125 cafeteria plan, such contributions are not subject to the comparability rules (but must comply with non-discrimination testing). Employer contributions are made through a cafeteria plan if under the written plan, employees may elect to receive cash or other taxable benefits in lieu of all or a portion of an HSA contribution, regardless of whether they made such a contribution. If they have not done so already, employers should consider amending their plan documents to permit pre-tax employee HSA contributions. With this feature in place, employers can provide matching contributions and condition contributions based on wellness program participation.
- IRS provided guidance on what actions an employer must take to locate former employees who did not receive an employer contribution. Reasonable actions include use of certified mail and IRS’ or the Social Security Administration’s letter-forwarding assistance.
- The Final Regulations indicate that if an employee opens an HSA after the employer provides its contributions, the employer must provide comparable amounts plus a reasonable interest rate. The final regulations state that such a rate is based on facts and circumstances, but IRS provided a safe harbor for employers that use the Federal short-term rate determined by IRS.
Other major provisions that did not change with the issuance of the Final Regulations include:
- The comparability rules do not apply to independent contractors, self-employed individuals, sole proprietors or partners in a partnership because they are not considered employees.
- Companies that are members of a controlled group, as defined under the Internal Revenue Code, are treated as a single employer.
- The categories of employees for comparability testing remain the same: current full-time employees, current part-time employees, and former employees (excluding those on COBRA).
- Full-time and part-time employees are tested separately for comparability purposes. Part-time employees are customarily employed for fewer than 30 hours per week; full-time employees work for 30 or more hours per week.
- If a married couple both works for the same employer and one spouse has coverage for both employees under the employer’s HDHP, the employer is not required to contribute to the HSA of the other spouse. However, if the employer contributes to the HSA of any employee who is an eligible individual with coverage under an HDHP that is not provided by the employer, the employer must make comparable contributions to the HSAs of both employees if they are both eligible individuals.
For your convenience, the Final Regulations have been posted on our website, under Benefit Resources at www.benefitsolved.com. Simply scroll down to the Federal Regulation PDFs section. You can also access them through the Federal Register website at: www.gpoaccess.gov/fr/index.html. Infinisource has specialists who are ready to assist employers with their HSA administration needs. You may contact either our Fringe Benefits Team at 866-370-3040 (www.benefitsolved.com/fsa_hra/fsaClient.asp) or our Sales Team at 800-779-6384 (SalesSupport@infinisource.net). Also look for details on an upcoming webinar on these regulations.
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