Employee Benefits Alert

Transcription

1 Employee Benefits Alert September 2005 Issue No. 48 Health Saving Accounts: Comparability Rules The IRS and Treasury recently published proposed regulations concerning the comparability rules for employer contributions to employee Health Savings Accounts (HSA). The proposed regulations further clarify and expand upon the comparability rules under Code Section 223. Although additional guidance on the HSAs comparability rules is welcome, the proposed regulations closely track previously issued guidance. Additional information about HSAs can be found in the Willis EB Alert #25. What is the comparability requirement? Most employers are already familiar with the highly technical IRS discrimination testing rules which generally apply to self-funded health plans, group term life insurance, cafeteria plans and a range of pension benefit programs. Discrimination testing rules measure the distribution of benefits and terms of eligibility to identify arrangements that are designed to favor higher earning participants. Are HSAs subject to such discrimination rules? Not exactly. Although employers are not required to use employer contributions to fund the HSAs of employees, those that choose to do so simply must do it in a nondiscriminatory (or comparable manner). Under these comparability rules, if an employer contributes to any employee's HSA, the employer must make comparable contributions available to all comparable participating employees. Although the simplicity of the comparability requirement is appealing when compared to traditional nondiscrimination rules and the testing involved, the comparability obligations work to preclude plan sponsors from utilizing plan provisions which would discriminate in favor of lower earning individuals. In other words, although discrimination in favor of lower earning workers is generally permissible for most other plans, such discrimination would represent a violation of the HSA comparability rules. Defining comparable employees and comparable contributions Comparable participating employees are those who are eligible individuals that have the same category of coverage under the employer s High Deductible Health Plan (HDHP) and who are in the same category of employees. The categories of HDHP coverage for purposes of applying the comparability rules are self-only HDHP coverage and family HDHP coverage, and the exclusive categories of employees for comparability testing purposes are current full-time employees, current part-time employees, and former employees. The rules clarify that former employees do not include those who have coverage under the employer s HDHP because of an election under COBRA. Employers should note that the comparability rules apply separately to each category of employees. An employer is required to make comparable contributions to the HSAs of all comparable participating employees who are in the same category of employees with the same category of HDHP coverage during the calendar year without regard to any other type of employee classification. For instance, the comparability rules do not apply separately to collectively bargained and non-collectively bargained employees or to groups of collectively bargained employees. Making contributions to the HSAs of employees based on their status as management or non-management also will not satisfy the comparability rules if management employees and non-management are deemed comparable participating employees. 1 Willis Employee Benefits Page 1

2 Contributions are comparable if they are either the same dollar amount or the same percentage of the deductible under the HDHP for employees who are eligible individuals with the same category of coverage. Comparable contributions must be made by the employer for the calendar year to the accounts of those eligible individuals who are comparable participating employees. The comparability rules do not apply to amounts rolled over from an employee s HSA because they are not considered to be employer contributions. After-tax employee contributions that an employee may request the employer to deduct from the employee s compensation and forward to the employee s HSA are also not employer contributions. Since the comparability rules only apply to contributions that an employer makes to the HSAs of employees, contributions made to the HSAs of independent contractors, that a sole proprietor makes to his or her own HSA, or that a partnership makes to a partner s HSA are not subject to these rules. All members of a controlled group are treated as one employer under the comparability rules. Eligibility can be controlled An employer that chooses to fund the HSAs of its employees does have some control over the contributions because it can define the groups that are eligible for the HSA. For instance, the employer can decide to make contributions to the HSAs of only those employees and/or former employees who are eligible individuals and who are covered under the employer s HDHP. There is no requirement that all employees be eligible for the HDHP (although if the HDHP itself is self funded, it must meet the nondiscrimination rules under Section 105(h) of the Code.) The employer would not be required to make comparable contributions to the accounts of those employees and/or former employees who are not covered by the employer s HDHP. However, if the employer chooses to contribute to the HSA of any employee and/or former employee who is an eligible individual with coverage under an HDHP, it must also contribute to the HSA of all such employees. Dual Coverage If an employee and his or her spouse are both eligible employees and work for the same employer and one employee-spouse has family coverage covering both employees under the employer s HDHP, the employer is not required to contribute to the HSAs of both employeespouses if the employer only chooses to make contributions to the HSAs of employees who are eligible individuals covered under its HDHP. The employer would only have to contribute to the HSA of the employee-spouse with coverage under the employer s HDHP but not to the HSA of the employee-spouse who is covered under the employer s HDHP simply by virtue of his or her spouse s coverage. The employer would have to contribute to both employees HSAs if they are both eligible individuals and the employer chooses to make comparable contributions to any employee who is an eligible individual with coverage under any HDHP. Even if the 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 limit for HSAs. Calculating comparable contributions Employees with self-only coverage under the HDHP are tested separately from employees with family HDHP coverage. This means that the 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 makes for employees who are eligible employees with family HDHP coverage and vice versa. Procedures for making comparable contributions Part-time/Seasonal employees: Prior guidance did not clearly address what employers with full-time employees working during the entire calendar year and employees who work full-time for less than the entire 12-month period should do in regards to meeting the comparability requirements. The proposed rules clarify that the comparability rules will be satisfied if the contribution is comparable when determined on a month-to-month basis. This means that if the employer contributes $240 2 Willis Employee Benefits Page 2

3 to the HSA of each full-time employee who works for the entire calendar year, the employer must contribute $60 to the HSA of a full-time employee who has only worked for three months of the calendar year (representing 3/12 of the year s contribution). In satisfying the rules, the employer must take into account all full-time and parttime employees who were eligible employees and eligible individuals for any month during the calendar year. Late establishment of HSA: If the employee has not established an HSA at the time the employer funds all the employees HSAs, the employer complies with the comparability rules by contributing comparable amounts to the late employee s HSA when the employee establishes the HSA, taking into account each month that the employee was a comparable participating employee. Matching contributions and incentive contributions not permitted: An employer may not base its contributions on the amount the employee contributes (e.g., matching contributions). Moreover, an employer may not make contributions to the HSA based on the employee s participation in health assessments, disease management programs or wellness programs, or based on the employee s attainment of a specified age or length of service with the employer because the contributions will most likely not be comparable. In addition the employer may not make additional contributions to the accounts of employees who qualify for the HSA catch-up contributions if all comparable participating employees do not qualify for the additional HSA contributions. See discussion below Cafeteria Plan exceptions to the comparability rules for methods of making differing contributions in some instances. Employer cannot fix noncomparable contributions: Since an account beneficiary has a nonforfeitable interest in the HSA, if the employer determines that the comparability test has been failed, the employer may not recover from the employee s HSA any portion of the employer s contribution previously made. Contributions made in excess of the comparability limits on annual limits are taxable, including an excise tax of six percent for that excess contribution, unless such excess contributions are returned prior to April 15th following the calendar year in which the excess contributions were made. Any shortfalls may be corrected until the April 15th following the calendar year in which the non-comparable contributions were made. If additional contributions are made to correct the non-comparable contributions, the employer must also contribute reasonable interest. Funding Methods There are three funding methods available for complying with the rules. The employer can choose to make contributions on a pay-as-you-go basis, on a look-back basis, or on a prefunded basis. An employer must generally use the same contribution method for all employees who were comparable participating employees for any month during the calendar year. With the pay-as-you-go method, the employer contributes to the HSAs of eligible employees throughout the year. Such contributions must be the same amount or the same percentage of the HDHP deductible for eligible employees as of the first day of the month with the same category of coverage and be made at the same time. Contributions made at the employer s regular payroll interval, even if it varies for different employee groups, would still be considered to be made at the same time. Under the look-back method, an employer can determine 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 to the employees HSAs at year end. The employer is also permitted to make all of its contributions to the HSAs of its employees who are eligible individuals at the beginning of the calendar year. Pre-funding will not cause the plan to fail the rules just because an employee who terminates employment prior to the end of the calendar year has received more contributions on a monthly basis than employees who have worked the entire calendar year. Although that will result in income tax and an excise tax for the affected employee. Contributions must be made, though, for all employees who are comparable participating employees for any month during the calendar year. This includes employees who are eligible individuals hired after the date of initial funding. For those employees who are hired after the date of initial funding, the employer may contribute on a pre-funded basis, on a pay-as-you-go basis or on a look-back basis. Whichever method the 3 Willis Employee Benefits Page 3

4 employer chooses, it must use the same contribution method for all employees who are eligible individuals hired after the date of initial funding. final regulations, taxpayers may rely upon the proposed regulations. Cafeteria plans and comparability rules Contributions made through a Section 125 cafeteria plan to the HSA of each employee who is an eligible individual are not subject to the comparability rules; however, such contributions would be subject to the section 125 nondiscrimination rules. Therefore, if contributions are made through the cafeteria plan an employer would be permitted to contribute to the account of each employee who is an eligible individual in an amount equal to the employee s contribution or a percentage of the amount of the employee s HSA contribution (matching contributions). The applicability of the comparability rules is based on whether or not the HSA contributions are made through the cafeteria plan, not on the status of the HDHP. If the HDHP is provided through a cafeteria plan but the employer s HSA contributions are not, the comparability rules would still apply to the HSA contributions. Therefore, employees who are eligible individuals and who participate in health assessments, disease management programs or wellness programs can have an incentive amount included in the cafeteria plan. Those employees can choose to have that contribution made to their HSA or choose to elect cash. Since the incentive is going into the cafeteria plan, the comparability rules would not apply to the employer s contributions. Excise Tax Failure to satisfy the comparability test subjects the employer to an excise tax equal to 35 percent of the aggregate amount contributed to health accounts for that period. The excise tax may be waived, in full or in part, if failure of the comparability test is due to reasonable cause and not willful neglect. Effective Date These proposed regulations will apply to employer contributions made on or after the date the final regulations are published. Pending the issuance of the 4 Willis Employee Benefits Page 4

5 U.S. Benefit Office Locations Anchorage, AK (907) Atlanta, GA (404) Austin, TX (800) Baltimore, MD (410) Bethesda, MD (301) Birmingham, AL (205) Boston, MA (617) Cary, NC (919) Charlotte, NC (704) Chicago, IL (312) Cleveland, OH (216) Columbus, OH (614) Dallas, TX (972) Denver, CO (303) Detroit, MI (248) Eugene, OR (541) Farmington, CT (860) Florham Park, NJ (973) Ft. Worth, TX (817) Grand Rapids, MI (616) Greenville, SC (864) Houston, TX (713) Jacksonville, FL (904) Knoxville, TN (865) Lake Mary, FL (407) Lexington, KY (859) Long Island, NY (516) Los Angeles, CA (213) Louisville, KY (502) Malvern, PA (610) Memphis, TN (901) Miami, FL (305) Milwaukee, WI (414) Minneapolis, MN (763) Mobile, AL (251) Montgomery, AL (334) Mountain View, CA (650) Naples, FL (239) Nashville, TN (615) New Orleans, LA (504) New York, NY (212) Omaha, NE (402) Orange County, CA (714) Philadelphia, PA (610) Phoenix, AZ (602) Pittsburgh, PA (412) Plainview, NY (516) Portland, OR (503) Raleigh, NC (919) Rochester, NH (603) Roswell, NM (505) St. Louis, MO (314) San Diego, CA (858) San Francisco, CA (415) San Juan, PR (787) Seattle, WA (206) Tampa, FL (813) Washington, DC (301) Wilmington, DE (302) Willis Employee Benefits Alert is produced by Willis Legal & Research Group. The information contained in this publication is not intended to represent legal advice and has been prepared solely for educational purposes. You may wish to consult your attorney regarding issues raised in this publication. Wills publications appear on the Internet at: Copyright Willis Employee Benefits Page 5