New Rules on Employer HSA Contributions Address Comparability Requirements

The Internal Revenue Service recently issued final regulations regarding employer contributions to Health Savings Accounts (HSAs) and the compatibility requirements that apply to them.  These rules, which apply to contributions made after January 1, 2007, make several changes to the HSA rules issued in August 2005.  Here are some of the most notable developments:

Exclusion for Collectively Bargained Employees
Employers can now make different comparable contributions to collectively bargained employees, as they are now excluded from comparability testing.  The exclusion also pertains to former employees who were covered by a collective bargaining agreement immediately before they terminated employment.

New Variations of Family HDHP Coverage
While the original version of the regulations specified only two categories of coverage for high deductible health plans (self-only and family), the final version gives three new tiers that fall under the family category: self-plus-one, self-plus-two, and self-plus-three-or-more.  According to the new rules, employers can make different contributions for each tier, as long as the self-plus-three-or-more is less than the self-plus-two, and the self-plus-two is less than the self-plus-one.

Clarification of the Cafeteria Plan Exemption
The final rules stipulate that employer HSA contributions made through a cafeteria plan are subject to the cafeteria plan nondiscrimination rules under Section 125 rather than the comparability rules.  In other words, if employees are allowed to contribute to an HSA by salary reduction through a cafeteria plan, all employer contributions to the HSA will be treated as being made through the cafeteria plan, and thus excluded from the comparability rules.

Employees Who Fail to Establish HSAs
When an employer originally funds an HSA for its workers but an employee fails to establish the HSA, the regulations require that reasonable interest be included when the employer makes a late contribution.

The final rules also provide guidelines for locating missing comparable participating employees, adding interest to contributions using a “reasonable interest rate”, and using the calendar year for the comparability testing period.

To view the final regulations in their entirety, click here.  If you have any questions about these rules, please contact our office at 919-403-1986.

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August 16, 2006

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