As more employers, transition to High Deductible Health Plans (HDHPs) and Health Savings Accounts (HSAs) to control rising health care costs, they should familiarize themselves with the IRS rules governing HSAs. Failure to understand the rules governing HSAs can have tax and legal implications for employees and employers alike.
Employer HSA contributions
Employers who choose to fund their employees’ HSAs should develop guidelines governing how much the employer will contribute to an HSA, when the employer will contribute, and the criteria for receiving an employer contribution.
- * How much to contribute: Employers should first review insurance carrier rules that impose limits on employer HSA contributions. Limits are usually predicated on a percentage of the HDHP deductible or a flat dollar limit. Failure to comply with contribution limits enables carriers to re-rate the HDHP plans and increase premiums. Secondly, employers should determine if contributions will vary based on the tier of coverage. Employers can choose to contribute a flat amount for every tier of coverage or a greater amount for employees with family coverage. Employer HSA contributions should always be made through a Cafeteria Plan (and may require a Cafeteria Plan amendment) to avoid complying with the HSA Comparability Rules. Lastly, employer HSA contributions may not be discriminatory and disproportionately benefit highly compensated employees, as the Cafeteria Plan would fail to comply with the Section 125 nondiscrimination rules.
- * When to contribute: Employers should consider how often they will contribute to an employee’s HSA. Employers with high turnover may consider making contributions on a pay period basis, while employers with low turnover may be able to make contributions on the first day of the plan year. Employers should also closely monitor employee HSA contributions to ensure they do not exceed the IRS annual maximum contribution limits. This is especially important when the HDHP is a non-calendar year plan, or the employer and employee contribute on a pay period basis. As employees can change (increase, decrease, start, or end) HSA elections monthly, they could easily exceed the annual HSA contribution limits.
- * Conditions to receive an HSA contribution: Employers also should disclose employee eligibility requirements to qualify for an employer HSA contribution.
- – Opening an HSA: HSAs are financial accounts requiring employees verify their identity before opening an account. If the employee fails to do so, an employer can forego contributing to the employee’s HSA.
- – Health FSA carryovers or grace periods: Employers offering full-scope FSA plans with a carryover feature or a 2 ½ month grace period, should notify employees enrolling in a HDHP/HSA compatible plan that they must have a zero balance in their full-scope FSA at the end of the FSA plan year. If the full-scope FSA has a carryover feature and an employee has a balance at plan year end, the employee is disqualified from making or receiving HSA contributions through the end of the new FSA plan year. If the employer offers a 2 ½ month grace period, the employee is disqualified from making or receiving HSA contributions for the entire health FSA grace period.
- – Enrollment in Medicare: Employers should also notify employees that enrolling in Medicare (Parts A, B, C, or D) will disqualify them from receiving or making pre-tax HSA contributions. In addition, employers should remind employees over age 65 who delay receiving Social Security benefits at their normal SS eligibility date that they will be retroactively enrolled in Medicare Part A six months before they start receiving SS benefits. As their Medicare Part A enrollment is retroactive, employees should cease making or receiving HSA contributions six months before the date they intend to receive SS benefits.
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Understanding IRS rules governing HSAs and their interaction with Medicare and other plans, is critical for employers and employees. It prevents employers from funding ineligible HSA accounts and protects employees from becoming subject to excise taxes for exceeding IRS HSA contribution limits.