CUNA Regulatory Comment Call


September 13, 2005

Health Savings Accounts (HSAs) – Comparability Rules

EXECUTIVE SUMMARY

  • HSAs are tax-exempt accounts established for the purpose of paying qualified medical expenses. Amounts contributed to an HSA belong to the individual and are completely portable. An eligible individual may establish an HSA with or without the involvement of his or her employer. As employers, credit unions are allowed to help fund an individual's HSA account, and may over time change their insurance plans to factor in HSAs. Employers may offer HSAs either as a stand-alone plan or through a cafeteria plan (in a cafeteria plan, all participants are employees and participants may choose among two or more benefits consisting of cash and qualified benefits). This proposal would impact credit unions that contribute to the HSAs of their employees either through a cafeteria plan or a stand-alone plan.

  • An employer is not required to contribute to the HSAs of its employees. However, in general, if an employer makes contributions to any employee's stand-alone HSA, the employer must make comparable contributions for the calendar year to the HSAs of all comparable participating employees. Comparable participating employees are eligible individuals who have the same category of high deductible health plan (HDHP) coverage. The categories of coverage are self-only HDHP coverage and family HDHP coverage.

  • Under Section 4980G of the IRS Code, if an employer fails to make comparable contributions to the HSAs of its employees during a calendar year, the employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to the HSAs of its employees during that calendar year.

  • The Internal Revenue Service (IRS) has issued a proposal providing guidance to clarify provisions on employer comparable contributions. The guidance addresses, in question-and-answer format, issues including:
    • Definition of employer contribution;
    • Categories of employees for comparability testing;
    • Calculation of comparable contributions;
    • Procedures for making comparable contributions;
    • Exception to comparability rules for cafeteria plans; and
    • Waiver of excise tax.

  • Comments on the proposal are due to the IRS by November 25, 2005. Please send your comments to CUNA by November 11, 2005. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004-2601. You may also contact us if you would like a copy of the IRS proposal, or you may access it here.

BACKGROUND

  • IRS Notice 2004-2, published in January 2004, stating that if an employer makes HSA contributions, the employer must make available comparable contributions on behalf of all “comparable participating employees” (that is, eligible employees with comparable coverage) during the same period. Contributions are considered comparable if they are either the same amount or same percentage of the deductible under the HDHP. The comparability rule is applied separately to part-time employees. The comparability rule does not apply to amounts rolled over from an employee's HSA or Archer MSA, or to contributions made through a cafeteria plan. The proposal incorporates the rules in this Notice.

  • IRS Notice 2004-50 provides guidance regarding “matching contributions” and cafeteria plans. If all employees who are eligible individuals do not contribute the same amount to their HSAs and, consequently, do not receive comparable contributions to their HSAs, the comparability rules are not satisfied, even if the employer offers to make available the same contribution amount to each employee who is an eligible individual. Employer HSA “matching contributions” made through a cafeteria plan are not subject to the requirement that all comparable participating employees receive comparable contributions. However, contributions, including “matching contributions,” to an HSA made under a cafeteria plan are subject to IRS Code Section 125 nondiscrimination rules (eligibility rules, contributions and benefits tests and key employee concentration tests). The proposal also incorporates the rules in this Notice.

  • Notice 2004-50 also indicates that the comparability rules will not be satisfied if an employer conditions contributions to an employee's HSA on an employee's participation in health assessments, disease management programs or wellness programs because if all comparable participating employees do not elect to participate in all the programs, they will not receive comparable contributions to their HSAs. Similarly, the comparability rules will not be satisfied if an employer makes additional contributions to the HSAs of all comparable participating employees who have attained a specified age or who have worked for the employer for a specified number of years, because if all comparable participating employees do not meet the age or length of service requirement, they will not receive comparable contributions to their HSAs.

DESCRIPTION OF THE PROPOSAL

Definition of Employer Contribution

  • The comparability rules apply only to employer contributions. Amounts rolled over from an employee's HSA are not employer contributions.

  • If an employer (per employee’s request) deducts after-tax amounts from the employee’s compensation and forwards these amounts as employee contributions to the employee’s HSA, those after-tax amounts are not subject to the comparability rules. Those amounts are not employer contributions.

Categories of Employees for Comparability Testing

  • An employer must make comparable contributions to the HSAs of all comparable participating employees (eligible individuals who are in the same category of employees and have the same category of HDHP coverage – self-only or family) during the calendar year. The categories of employees for comparability testing are the following:
    • Current full-time employees (normally employed for 30 or more hours per week);
    • Current part-time employees (normally employed for fewer than 30 hours per week); and
    • Former employees (except for former employees with coverage under the employer's HDHP because of an election under a COBRA continuation provision).

  • There is no exception to the comparability rules for management employees or collectively bargained employees.

Calculation of Comparable Contributions

  • An employer is not required to contribute the same amount or the same percentage of the deductible for employees who are eligible individuals with self-only HDHP coverage that it contributes for employees who are eligible individuals with family HDHP coverage. An employer may even contribute only to one class of eligible individuals.

  • If an employer contributes to the HSA of any employee in a category of employees, the employer must make comparable contributions to the HSAs of all comparable participating employees within that category. Therefore, the comparability rules apply to a category of employees only if an employer contributes to the HSA of any employee within the category. For example, an employer that makes comparable contributions to the HSAs of all full-time employees who are eligible individuals but does not contribute to the HSA of any employee who is not a full-time employee satisfies the comparability rules.

  • If during a calendar year, an employer contributes to the HSA of any employee who is an eligible individual covered under an HDHP provided by the employer, the employer is required to make comparable contributions to the HSAs of all comparable participating employees with coverage under any HDHP provided by the employer. An employer that contributes only to the HSAs of employees who are eligible individuals with coverage under the employer's HDHP is not required to make comparable contributions to HSAs of employees who are eligible individuals but are covered by an HDHP not provided by the employer. However, an employer that contributes to the HSA of any employee who is an eligible individual with coverage under any HDHP, in addition to the HDHPs provided by the employer, must make comparable contributions to the HSAs of all comparable participating employees whether or not covered under the employer's HDHP.

  • If an employee and his or her spouse are eligible individuals who work for the same employer and one employee-spouse has family coverage for both employees under the employer's HDHP, if the employer makes contributions only to the HSAs of employees who are eligible individuals covered under its HDHP, the employer is not required to contribute to the HSAs of both employee-spouses. The employer is required to contribute to the HSA of the employee-spouse with coverage under the employer's HDHP, but is not required to contribute to the HSA of the employee-spouse covered under the employer's HDHP by virtue of his or her spouse's coverage. However, if the employer contributes to the HSA of any employee who is an eligible individual with coverage under any HDHP, the employer must make comparable contributions to the HSAs of both employee-spouses if they are both eligible individuals. If an employer is required to contribute to the HSAs of both employee-spouses, the employer is not required to contribute amounts in excess of the annual contribution limits.

Procedures for Making Comparable Contributions

  • Employer contributions to the HSAs of employees who work full-time for less than twelve months satisfy the comparability rules if the contribution amount is comparable when determined on a month-to-month basis. For example, if the employer contributes $400 to the HSA of each full-time employee who works the entire calendar year, the employer must contribute $100 to the HSA of a full-time employee who works three months of the calendar year.

  • In determining whether the comparability rules are satisfied, an employer must take into account all full-time and part-time employees who were eligible individuals for any month during the calendar year. Employers may comply with the comparability rules when some employees who are eligible individuals do not work for the employer for an entire year by either of the following three methods:
    • Contributions on a pay-as-you-go-basis
      An employer may contribute amounts at one or more times for the calendar year to the HSAs of employees who are eligible individuals, if contributions are the same amount or the same percentage of the HDHP deductible for employees who are eligible individuals with the same category of coverage and are made at the same time. If an employer makes HSA contributions each pay period, it must do so for each comparable participating employee who is an employee during the pay period. The employer may change the amount of contributions at any point as long as the changed amounts satisfy the comparability rules.
      OR
    • Contributions on a look-back basis
      An employer may also satisfy the comparability rules by determining comparable contributions for the calendar year at the end of the calendar year, taking into account all employees who were eligible individuals for any month during the calendar year and contributing the correct amount (a percentage of the HDHP deductible or a specified dollar amount for the same categories of coverage) to the employees' HSAs by April 15th of the following year. If an employer makes comparable contributions on a look-back-basis, it must do so for each employee who was a comparable participating employee for any month during the calendar year.
      OR
    • Contributions on a pre-funded basis
      An employer may make all of its contributions to the HSAs of employees who are eligible individuals at the beginning of the calendar year. An employer that makes comparable HSA contributions on a pre-funded basis will satisfy the comparability rules even if an employee who terminates employment prior to the end of the calendar year has received more HSA contributions on a monthly basis than employees who worked the entire calendar year. If an employer makes HSA contributions on a pre-funded basis, it must do so for all employees who are comparable participating employees at the beginning of the calendar year. An employer that makes HSA contributions on a pre-funded basis must make comparable HSA contributions for all employees who are comparable participating employees for any month during the calendar year, including employees hired after the date of initial funding. An employer that makes HSA contributions on a pre-funded basis may also contribute on a pre-funded-basis to the HSAs of employees who are eligible individuals hired after the date of initial funding. Alternatively, an employer that has pre-funded the HSAs of comparable participating employees may contribute to the HSAs of employees who are eligible individuals hired after the date of initial funding on a pay-as-you-go basis or on a look-back basis. An employer that makes HSA contributions on a pre-funded basis must use the same contribution method for all employees who are eligible individuals hired after the date of initial funding.

  • An employee has until December 31 of the calendar year to establish an HSA to receive that year’s contributions for the preceding months. The employer is not required to make comparable contributions for the calendar year if the employee fails to establish an HSA by December 31.

  • If an employer determines that the comparability rules are not satisfied for a calendar year, the employer may not recover from an employee's HSA any portion of the employer's contribution to the employee's HSA because an account beneficiary's interest in an HSA is nonforfeitable. However, an employer may make additional HSA contributions to satisfy the comparability rules. An employer may contribute up until April 15th following the calendar year in which the non-comparable contributions were made. An employer that makes additional HSA contributions to correct non-comparable contributions must also contribute reasonable interest.

Exception to the Comparability Rules for Cafeteria Plans

  • An employer does not violate the comparability rules if it maintains an HDHP and makes HSA contributions through a cafeteria plan only for those eligible employees. However, the employer may be in violation of the cafeteria plan nondiscrimination rules.

  • Under IRS Code Section 125, a cafeteria plan which provides health benefits shall not be treated as discriminatory if: (1) contributions under the plan on behalf of each participant include an amount which equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated OR equals or exceeds 75 percent of the cost of the health benefit coverage of the participant (similarly situated) having the highest cost health benefit coverage under the plan AND (2) contributions or benefits under the plan in excess of those described in (1) bear a uniform relationship to compensation.

Waiver of Excise Tax

  • The proposal provides some flexibility in terms of with respect to the imposition of the excise tax. If an employer fails to satisfy the comparability rules due to reasonable cause and not to willful neglect, the IRS may waive all or a portion of the excise tax to the extent the payment of the full tax (35%) would be excessive in relation to the failure.

QUESTIONS REGARDING THE PROPOSAL

Matching Contributions Made Through a Cafeteria Plan

  1. The proposal does not address matching contributions. However, the IRS is requesting comments on whether the ratio of an employer’s matching contributions made through a cafeteria plan to an employee’s salary reduction HSA contributions should be limited. In other words, should there be a calendar year limit or a percentage ratio limit for employer contributions similar to those used in a 401(k)? For example, 50% of the first 3% of salary reduction? Or 100% of the first $200 of salary reduction?

    What should the limit be?











  2. Should employer matching contributions exceeding a specific limit that are made through a cafeteria plan be subject to the comparability rules?

    Yes ______ No ______

    If not, why not?











    Calculation of Comparable Contributions

  3. Are the rules concerning calculation of comparable contributions clear? Are they reasonable?

    Yes ______ No ______

    If not, how could they be made more clear/reasonable?











    Procedures for Making Comparable Contributions

  4. Do you agree with the three methods that employers are to chose from to make contributions when some employees who are eligible individuals do not work for the employer for an entire year: the pay-as-you-go basis, the look-back basis, and the pre-funded basis?

    Yes ______ No ______

    If not, what problems do you foresee/what different approach(es) do you recommend?











  5. Other comments?











    Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
    Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
    Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
    Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com
    Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com
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