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IRS has issued final regs providing guidance on the Health Savings Account (HSA) comparability rules under Code Sec. 4980G where an employee has not established an HSA by Dec. 31 of a year and where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses. The regs, which deal with issues not addressed in earlier guidance, apply for employer contributions made for calendar years beginning on or after Jan. 1, 2009.
HSA recap. Under Code Sec. 223, eligible individuals may set up HSAs if they are covered under high deductible health plans (HDHPs) and not covered under any other non-HDHPs (except for certain permitted insurance or coverage). Eligible individuals may, subject to statutory limits, contribute to HSAs and so may employers as well as other persons on behalf of eligible individuals. Employer contributions to an HSA are excludable from the employee's income and distributions for qualifying medical expenses are tax-free.
Comparability requirement. Unlike many other employer-provided tax-favored benefits, HSAs aren't subject to nondiscrimination rules restricting the amount of benefits provided to highly compensated employees. Instead, if an employer decides to fund HSAs, it must make "comparable" contributions to all comparable participating employees' HSAs. In general, all employer contributions to employee HSAs must be the same amount or the same percentage of the HDHP deductible for all employees with the same category of HDHP coverage. Code Sec. 4980G imposes an excise tax on employers that fail the comparability requirement.
In 2006, IRS issued final regs on the comparability requirement, but reserved on the issue of how to handle the situation of an employee who has not established an HSA by the end of the calendar year (see 8/3/2006 Weekly Alert, p. 365). Proposed reliance regs issued in 2007 provided guidance on this issue as well on another issue relating to acceleration of employer contributions (see 6/7/2007 WeeklyAlert, p. 270). IRS has now finalized the proposed reliance regs without substantive changes.
HSA established late. The regs address the situation of employees who haven't established an HSA by Dec. 31, or who may have established an HSA without notifying the employer. Under the final regs, the employer must comply with a notice requirement and a contribution requirement in order to meet the comparability rules for such employees.
To comply with the notice requirement, by Jan. 15 of the following year, the employer must provide written notice that each eligible employee who, by the last day of February, both establishes an HSA and notifies the employer that he or she has established the HSA will receive a comparable contribution to the HSA. For each such eligible employee who establishes an HSA and so notifies the employer by the end of February, the employer must by Apr. 15 contribute to the HSA comparable amounts (taking into account each month that the employee was a comparable participating employee) plus reasonable interest. The notice may be delivered electronically. The regs include sample language that employers may use in preparing their own notices. (Reg § 54.4980G-4, Q&A-14)
Acceleration of employer contributions. The final regs also provide that, for any calendar year, an employer may accelerate part or all of its contributions for the entire year to the HSAs of employees who have incurred during the calendar year qualified medical expenses exceeding the employer's cumulative HSA contributions at that time. Accelerated contributions must be available on an equal and uniform basis to all eligible employees throughout the calendar year and employers must establish reasonable uniform methods and requirements for acceleration of contributions and the determination of medical expenses. Employers aren't required to contribute reasonable interest on either accelerated or non-accelerated HSA contributions. (Reg § 54.4980G-4, Q&A-15)