HSA Guidance Again: Comparability Rules Re-Visited
On June 1, 2007, the IRS and Treasury issued proposed regulations on two very narrow aspects of the health savings account (HSA) comparability rules. These proposed regulations address the situation in which an individual has either not established, or has not advised the employer about the establishment of, an HSA prior to the end of the calendar year. The proposed regulations also address a situation of accelerating contributions to individuals who incur medical expenses. The regulations provide guidance about how to ensure compliance with the HSA comparability rules in these situations.
Liability for Making Comparable Contributions
According to the 2005 proposed regulations, if an individual had not established an HSA account prior to the end of the calendar year, the employer was relieved of any liability for making comparable contributions. The law modifying HSAs in 2006 removed this provision; thus, making it incumbent upon employers to make comparable contributions in these situations.
According to the 2007 proposed regulations, an employer is obligated to notify employees about the availability of comparable contributions. The notice must be provided no later than January 15th of the calendar year, following the calendar year in question; and the notice must be provided only to individuals about whose HSAs the employer has no knowledge. The notice must advise the individuals that an employer contribution would be made to an HSA, as long as the individual establishes an account, and tells the employer about the establishment of the account, prior to the end of February of the calendar year, following the calendar year for which the contribution would be made. If the employer learns about the establishment of the HSA, the employer would be required to make the comparable contribution, together with reasonable interest.
If the employee does not advise the employer about the establishment of the HSA, the employer would be relieved of any liability for failure to make a comparable contribution. The notice must include an explanation about how the employee should communicate the establishment of the HSA to the employer.
The notice can be provided electronically; and, it need only be provided to individuals about whose HSA the employer has no knowledge. The proposed regulations include a model notice that can be used as a starting point for this purpose (see Model Notice in Q&A 14(c)).
These rules only apply when the HSA and employer contributions are offered outside the scope of a cafeteria plan (IRC§ 125 plan).
One of the issues that has caused heartache for perspective HSA participants is the fear of incurring medical expenses prior to the HSA being sufficiently funded. These proposed regulations allow an employer to accelerate its contribution to an individual who experiences high medical claims, without running afoul of the comparable contribution rules.
The employer would not be obligated to pay interest to individuals who receive or who don’t receive the accelerated contribution. The employer would be obligated to make an accelerated contribution to any similarly situated individual.
These regulations can be relied upon until finalized. Alternatively, employers can continue to rely upon the 2005 proposed regulations for accounts not established by the end the plan year. This means that employers would not be obligated to provide the notice, or to make a contribution until regulations are finalized.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.