IRS Finalizes Rules on Employer HSA Comparable Contributions

May 13, 2008

With only slight modifications from the proposed version, the IRS recently issued final regulations on how employers can make comparable contributions to eligible employees' HSAs in two scenarios:

• 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

The regulations are found at 26 CFR §54.4980G-4 and are in addition to the final comparability regulations issued in 2006. As noted in our June 2007 News & Review article, employers should understand that these 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. The rules go into effect on January 1, 2009.

No HSA Established by December 31
What happens when an employee does not open an HSA or fails to provide HSA information to the employer by December 31? When this occurs, 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 for this purpose.

The employer must then 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 also allow an employer to accelerate part or all of their contributions for any calendar year to the HSAs of eligible employees who have incurred qualified medical expenses during that year and have exceeded the employer's year-to-date HSA contribution. Employers who accelerate contributions must do so 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 already provided employers with the ability to accelerate when they make contributions through a cafeteria plan.

A copy of the Final Regulations is available at www.infinisource.net under the Benefit Resources tab.