August 5, 2008

New HSA Proposed Rules - Employer Contributions and Excise Tax

The IRS and Treasury have been busy again, espousing their positions on health savings accounts (HSAs).  This time, the guidance comes in the form of proposed regulations.  These regulations relate to the HSA comparability (discrimination) rules.  The regulations also address the excise (penalty) tax that can be assessed for several types of plan violations. 

Employer Comparable Contributions to HSAs

Special Rules for Contributions to Non-highly Compensated Employees

The HSA comparability rules apply if an employer contributes to an HSA, and if the HSA is not a part of a cafeteria plan.  The rules require that comparable employer contributions be made for like classes of employees.  These regulations specifically address the ability of an employer to make a higher contribution for non-highly compensated employees (NHCEs).  If a higher employer contribution is to be made to NHCEs, it must be comparable for all NHCEs with like categories of coverage.

For this purpose, “highly compensated” is defined as it is in IRC §414(q):

Any employee who was:

1.  A 5% owner at any time during the year, or preceding year; or

2.  For the preceding year:

  • Had compensation from the employer in excess of $105,000 (indexed for 2008); and,
  • If elected by the employer, was in the group consisting of the top 20% of employees when ranked based on compensation.

The proposed regulations also clarify that if the one-time rollover is permitted from an FSA or HRA to an HSA, it must be permitted for all comparable HSA-eligible individuals.

Maximum HSA Contributions for Employees who become HSA-eligible Mid-Year

The proposed regulations address employer contributions when an individual commences HSA participation mid-year.  As a result of the Tax Relief and Health Care Act of 2006, if an individual is HSA-eligible on first day of the last month of the tax year (December 1 for a calendar year taxpayer), then the individual can make a full-year HSA contribution.  The individual must remain eligible for a testing period (the full following calendar year, for a calendar year taxpayer). 

According to the proposed regulations, an employer can either pro-rate its contribution to individuals who become HSA-eligible mid-year; or, make the full HSA contribution for the year, without violating the comparability rules.  The regulations make clear that whatever the employer does for one mid-year eligible individual must be done for all mid-year eligible individuals. 

Effective Date

These regulations are scheduled to become effective for the 1st tax year beginning after the regulations are final; but can be relied upon now.

Excise Taxes 

There are many aspects of employee benefit plan administration that can result in an excise (penalty) tax for failures.  Among these are COBRA violations, HIPAA portability violations, Newborns and Mothers’ Health Protection Act violations, Mental Health Parity violations, Archer MSA comparable contribution violations, and HSA comparable contribution violations.  These regulations clarify that the excise tax be reported on the Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the IRC.  The excise tax must be paid within the same time frame as the Form 8928 is filed, without extensions.  For HSA comparability failures, this would be April 15th of the year, following the year of the violation. 

Effective Date

The proposed excise tax regulations are scheduled to become effective for plan years beginning on or after the 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.

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