Aug 10, 2018
As a valued resource for many of our brokers across the state, LISI gets various questions on benefits and compliance. With Q4 approaching, now is the time to study and prepare to answer questions that commonly come up during open enrollment. Over the next several months, we will take some time to provide clarity on some common areas of confusion.
Q: Can we make matching contributions to our employees’ HSAs? Q: We contribute to our employees’ HSAs. Several employees have not yet opened an HSA account. What are our obligations with the contributions we planned to make?
A: The answer to both questions depends on whether the employer is contributing to the employees’ HSAs through a cafeteria plan or outside of a cafeteria plan. If an employer allows employees to make pre-tax salary reduction contributions to their HSAs, the arrangement is deemed to be running through a cafeteria plan. In this case, employers must make sure they comply with Section 125 nondiscrimination rules when structuring their contributions.
On the other hand, some employers make contributions outside of a cafeteria plan. Section 125 nondiscrimination rules don’t apply in this case. But employers have an entirely separate set of rules to comply with instead – the so-called “Comparability Rules.” These rules establish requirements for how an employer structures their contributions and what an employer must do when employees fail to establish their HSAs on a timely basis.
Employer HSA Contributions under the Comparability Rules
The requirement to make comparable contributions applies to all non-collectively bargained employees who are in the same employment category (full-time, part-time, or former employees) with the same tier of HDHP coverage (single or family). The Comparability Rules require an employer to make the same dollar amount contribution to such employees or contribute the same percentage of the deductible. Under these parameters, matching contributions are not permitted. In addition, there may be implications for other contribution strategies to ensure that contributions meet the comparability requirements, such as making lump-sum contributions at the beginning of the year, making contributions as part of a wellness program incentive, or handling contributions for employees who start or terminate employment mid-month or mid-year. The rules also set forth requirements for how employers must structure their contributions if they recognize multiple tiers of family HDHP coverage (employee + 1, employee + 2, and employee + 2 or more).
Steps to Take When Employees Fail to Establish Their HSAs in a Timely Manner The Comparability Rules also outline specific steps for employers to take when employees fail to establish their HSAs on a timely basis. Employers that offer HSAs through Section 125 cafeteria plans may implement a policy of making no contributions for employees who fail to establish HSAs. But the requirements for HSAs offered outside of a cafeteria plan are more complex. Under the Comparability Rules, employees have until the end of February following the HSA calendar year to establish an HSA and still receive the entire promised contribution amount. The employer must provide a written notice of this timeline twice: first, no earlier than 90 days before the employer makes their first HSA contribution for the calendar year (Year 1), and second, no later than January 15 of the following calendar year (Year 2). The IRS has provided a model notice that employers can use for this purpose. If (and only if) an employee fails to open an HSA, or to advise the employer that an HSA has been established, the employer is not required to make a contribution for that employee.
Cafeteria Plan Vs. Comparability Rules Running employer HSA contributions through the cafeteria plan gives the employer more flexibility to differentiate contributions for employee categories. In addition, when employees make HSA contributions via salary reductions through the cafeteria plan, the employer and the employees realize tax savings. For these reasons, employer HSA contributions are often run through the cafeteria plan. However, employers who don’t allow employees to make pre-tax HSA contributions through a cafeteria plan and instead make employer HSA contributions outside the cafeteria plan must comply with the Comparability Rules. Employers who violate the Comparability Rules may incur a 35% excise tax on all HSA contributions they make for the year, including any contributions that otherwise would have complied with the Comparability Rules.
Contact your LISI Regional Sales Manager to find out more.
