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CCH® PAYROLL — 7/22/08

IRS issues proposed rules on HSA comparable contributions

The Treasury and the IRS have issued proposed pension tax regulations that provide guidance on employer comparable contributions to Health Savings Accounts (HSAs) under Code Sec. 4980G. Pension excise tax regulations are also proposed covering the return requirements for excise tax payments for failure to meet the continuing coverage requirements under Code Sec. 4980G and Code Sec. 4980D, as well as the comparable coverage requirements for Archer Medical Savings Accounts (MSAs) under Code Sec. Sec. 4980E and for HSAs.

Non-highly compensated employees

The proposed regulations allow an employer to contribute to the HSAs of non-highly compensated employees in an amount that is larger than the employer's contribution to the HSAs of the highly compensated employees with comparable coverage during a period. Contributions to highly compensated employees may not exceed employer contributions to the HSAs of non-highly compensated employees with comparable coverage during a period.

The comparability rules will still apply with respect to contributions to HSAs for those eligible individuals who are in the same category of employees with the same category of high deductible health plan coverage (HDHP). The proposed regulations define a highly compensated employee as either (1) a 5% owner during the tax year or the preceding year or (2) an employee who for the preceding year has compensation from the employer in excess of $105,000 (indexed for inflation for 2008) and, if elected by the employer, was in the group consisting of the top 20% of employees when ranked on compensation.

Maximum HSA contribution

Eligible individuals may make or have made the maximum annual HSA contribution based on their HDHP coverage during the last month of the tax year. Under the proposed regulations, a employer can contribute up to this maximum contribution on behalf of all employees who are eligible individuals during the last month of the tax year, including employees who become eligible after January 1 of the calendar year and eligible individuals who are hired after that date (midyear eligible individuals).

Special comparability

A qualified HSA distribution is a direct distribution of an amount from a health flexible spending arrangement (health FSA) or from a health reimbursement arrangement (HRA) to an HSA. Under the proposed regulations, if an employer offers this type of distribution to any employee covered under any HDHP, the employer must offer qualified HSA distributions to all employees who are eligible individuals covered under any HDHP. Employers who offer qualified HSA distributions only to employees who are eligible individuals covered under the employer's HDHP are not required to offer qualified HSA distributions to employees who are eligible individuals, but who are not covered under the employer's HDHP. (73 FR 40,793, July 16, 2008.)

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