IRS Finalizes Regulations Regarding Employer Contributions to HSAs

On July 31st, the IRS issued final regulations regarding the excise tax that applies to employer contributions to health savings accounts (HSAs) when those contributions are not "comparable" for certain categories of participants. The regulations apply to employer HSA contributions made on or after January 1, 2007. The final regulations expand on the proposed rules published on this subject last summer in the following ways:

Additional categories of coverage permitted. In general, if an employer contributes to any employee's HSA, the employer must make comparable contributions to the HSAs of all comparable participating employees. Comparable participating employees are the eligible individuals who are in the same category of employees (full-time, part-time or former) and who have the same category of high deductible health plan coverage. The only categories of coverage permitted under the proposed rules were self-only and family. The final rules expand the family category to allow self-plus-one, self-plus-two, and self-plus-three or more. They also require that an employer's contribution with respect to the self-plus-two category cannot be less than the employer's contribution for the self-plus-one category, and the employer's contribution to the self-plus-three or more category cannot be less than the employer's contribution for the self-plus-two category.



Collectively bargained employees are disregarded. Under the final rules, employer HSA contributions for employees covered by collective bargaining are not subject to the comparability requirement, and contributions for other employees are not affected by the HSA contributions (or lack thereof) for collective bargaining units.



Additional guidance regarding employer HSA contributions made through cafeteria plans. The comparability requirement does not apply to employer HSA contributions that are made through a cafeteria plan. The final rules provide that this exemption applies if, under a 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, regardless of whether an employee actually elects to contribute any salary reduction amounts to an HSA. The examples in the regulations clarify that, so long as employees have this right to make pre-tax salary reduction contributions to their HSAs through the cafeteria plan, employer contributions to employees' HSAs made through the cafeteria plan will also be treated as exempt from the comparability rules. This is true even if the employees do not have the right to receive cash or other taxable benefits in lieu of the employer's HSA contribution. (Note that in such cases, the Section 125 cafeteria plan nondiscrimination rules will apply, in lieu of the comparability rules.) These final rules may permit design options that could be attractive in some situations, such as matching employees' HSA contributions or conditioning employer HSA contributions on participation in wellness programs or health screenings.



Comparable contributions for former employees. Employers may make HSA contributions on behalf of former employees, but any such contributions must be comparable among the category of former employees. Employers could find it difficult to meet this requirement if they cannot locate former employees. The final regulations provide that employers making HSA contributions on behalf of former employees must take reasonable actions to locate any missing former employees who are owed a comparable contribution, including the use of certified mail and the IRS or Social Security Administration letter forwarding programs.