IRS Issues Final Rules For Employer Comparable Contributions To Health Savings Accounts Under 4980G.

On April 17, 2008, the Treasury Department issued final regulations on employer comparable contributions to employees Health Savings Accounts (HSAs) under Section 4980G of the Internal Revenue Code of 1986, as amended (the "Code"), in instances where employees have not established the HSAs by December 31st and where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses. The final regulations maintain all of the substantive provisions included in the proposed regulations issued in June of 2007. The proposed and final regulations address an issue that was "reserved" when the IRS in July 2006 released final regulations imposing an excise tax for an employer that fails to make comparable contributions to HSAs of its employees.

Background

HSAs are tax-exempt savings vehicles funded by individual and/or employer cash contributions that may be used to pay qualified medical expenses. An individual is eligible to make contributions to an HSA, or have employer contributions made on his or her behalf, only if he or she, as of the first day of the month, is covered under a high deductible health plan (HDHP) and is not covered under any other health plan, other than one providing certain "permitted coverage" (i.e., dental or vision). While an employer is not required to contribute to the HSAs of its employees, Section 4980G of the Code provides that if an employer contributes to the HSA of any employee for a calendar year, it must make comparable contributions to the HSAs of all comparable participating employees or be subject to an excise tax equal to 35% of the aggregate amount contributed by the employer during the calendar year. The final regulations issued on July 31, 2006 provide guidance for determining who is a comparable participating employee and how to calculate comparable contributions.

Employee Has Not Established HSA By December 31 The final regulations issued on April 17, 2008 provide a means for employers to comply with the comparability requirements with respect to employees who have not established an HSA by the end of the calendar year, as well as employees who have established an HSA but failed to notify the employer.

According to the regulations, employers must give written notices to employees who have not established HSAs by the end of the calendar year, or who have failed to notify the employer regarding their HSA.1 The notices, which can be sent electronically, are deemed to be timely if provided no earlier than 90 days before the first HSA employer contribution for that calendar year and no later than January 15th of the following calendar year. The content of the notice must state that each eligible employee who, by the last day of February, both establishes an HSA and notifies the employer will receive a comparable contribution to their HSA. For each eligible employee that establishes an HSA and informs the employer by the end of February, the employer must, by April 15th, contribute comparable amounts,2 taking into account each month in the prior year that the employee was a comparable participating employee, plus reasonable interest. The final regulations provide sample language that employers may use in preparing their own notices.

Acceleration Of Employer Contributions Importantly, the final regulations also address a second issue relating to the acceleration of employer contributions. The rules allow employers to accelerate part or all of their contributions to HSAs for employees who have incurred eligible qualified medical expenses during the calendar year that exceed the employers cumulative HSA contributions at a time during the year. The accelerated contributions must be available on an equal and uniform basis to all eligible employees throughout the calendar year. To accelerate contributions for the reason described above, employers must establish reasonable uniform methods and requirements for the determination of medical expenses and acceleration of contributions.

The final regulations make clear that employers that accelerate contributions for employees who have incurred qualified medical expenses exceeding the employers cumulative HSA contributions will not fail to satisfy the comparable contribution rules so long as all comparable employees receive the same amount or the same percentage for the calendar year. Employers also will still satisfy the comparable contribution requirements if employees receiving accelerated contributions to their HSAs terminate employment prior to the end of the calendar year, even if that means that such employees received more contributions on a monthly basis than employees who worked for the entire calendar year. Employers are not required to contribute reasonable interest on either accelerated or non-accelerated HSA contributions.

Effective Date

While the final rules apply to employer contributions made for calendar years beginning on or after January 1, 2009, employers are permitted to rely on this guidance as of the effective date of April 17, 2008.

Footnotes

1. The employer may provide the notice to other employees but if an employee has earlier notified the employer of an HSA, or if the employer has previously made contributions to that employees HSA, the employer may not condition making comparable contributions on receipt of any additional notice from that employee.

2. According to the final regulations issued in July 2006, contributions are comparable if they are made for the same amount or the same percentage of the deductible for individuals with the same category of coverage.

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