- Internal Revenue Service Issues Final Regulations on Employer Comparable Contributions yo Health Savings Accounts
- October 5, 2006
- Law Firm: Winston & Strawn LLP - Chicago Office
Code Section 4980G imposes an excise tax of 35 percent of the aggregate amount contributed to the HSA of all of the employees of an employer (determined on a controlled group basis) if an employer fails to make comparable contributions to the HSAs of its employees during a calendar year. In August 2005, the Internal Revenue Service issued proposed regulations and recently issued final regulations under Code Section 4980G.
The Code does not require an employer to contribute to the HSA of any of its employees. However, if it does, it must make comparable contributions to the HSAs of all comparable participating employees. Comparable participating employees are eligible individuals (i) who are in the same category of employees and (ii) who have the same category of high deductible health plan ("HDHP") .
These are three categories of employees for comparability testing:
- current full time employees;
- current part time employees; and
- former employees (except former employees with coverage under a HDHP because of COBRA).
In an important change from the proposed regulations, employees covered by a collectively bargained agreement are disregarded for these purposes, so long as health benefits were the subject of good faith bargaining.
Under the proposed regulations, there were two categories of HDHP - self only and family. The final regulations allow family coverage to be subdivided into additional categories:
- self plus one;
- self plus two; and
- self plus three or more.
The comparability rules of Code Section 4980G do not apply to HSA contributions that an employer makes through a Code Section 125 cafeteria plan. Rather, these contributions are subject to nondiscrimination testing under Code Section 125. In this regard, the final regulations provide that employer contributions to an employee’s HSA are made through a cafeteria plan 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 HSA contributions, regardless of whether an employee actually elects to contribute any amount to a HSA by salary reduction. By way of illustration, the regulation indicated that nonelective employer contributions made to all HSA eligible participants are treated as made through a cafeteria plan because the participants are also permitted to make their own pre-tax salary reduction contributions to fund their HSAs.
The final regulations also provide guidance on the actions an employer must take to locate any missing comparable participating former employees for purposes of contributions to eligible former employees. Generally, such reasonable action would include certified mail, the IRS letter forwarding program, or the Social Security Administration letter forwarding program.
Among other items addressed in the final regulations:
- a rejection of the request that testing for comparability purposes be made on a plan year rather than a calendar year basis;
- the reasonable interest rate for additional HSA contributions to correct non-comparable contributions (which contribution must be made by April 15 of the subsequent calendar year) depends upon the facts and circumstances, although the federal short term interest rate is a safe harbor; and
- if the failure to make noncomparable contributions to employees’ HSA accounts is due to reasonable cause and not to willful neglect, all or a portion of the excise tax can be waived if the tax would be excessive relative to the failure involved.