ComplianceTax & AccountingMarch 17, 2019

Health savings accounts: Employer comparable contributions – employee fails to establish an account

Overview

An employer that offers high deductible health plan (HDHP) coverage as an employee benefit, and subsequently chooses to make regular contributions to the Health Savings Accounts (HSAs) of its employees, generally must make comparable contributions on behalf of each eligible individual. The employer’s contribution, if offered as part of his/her employee benefit package, is often used as an incentive for employees to select and continue participating in the HDHP. An employer contribution is considered comparable if it is the same amount or the same percentage of a comparable employee’s HDHP deductible. Comparable participating employees are those that are covered under the employer’s HDHP and are eligible to establish an HSA, have the same category of health insurance coverage (i.e., self only or family), and have the same category of employment status (i.e., part-time or full-time).

Eligible employee does not have an HSA

Keep in mind that to satisfy the comparable contribution rules an employer must make a contribution on behalf of each eligible participating employee. So what happens if an eligible employee does not have an HSA? Can the employer establish an HSA on behalf of such employee to ensure the comparable contribution requirement is not violated? The answer is no. However, for an employer to meet the comparable contribution requirement in a case where an eligible employee has not established an HSA by December 31, it must meet a “notification” requirement. An employer will want to make sure it complies with this notification requirement as failing to make comparable contributions could result in an excise tax of 35% of the amount contributed.

Solution

An employer meets the notification requirement if by January 15 of the following calendar year it provides a written “Notice to Employees Regarding Employer Contributions to HSAs” to all such employees. The notice must state that each eligible employee who, by the last day of February, establishes an HSA and notifies the employer that he/she has established an HSA, will receive a comparable contribution for the prior year. The employer will meet the contribution requirement for these employees if it makes comparable contributions to the employee’s HSAs for the prior year. The model notice provided in Internal Revenue Code regulations states that “If, however, you do not establish your HSA or you do not notify us of your HSA account information by the deadline, then we are not required to make any contributions to your HSA for [insert applicable year]”. This last sentence makes it quite clear that an employer is not required to set up an HSA for an employee. This model notice is found in Regulation 54.4980G-4, A-14(c). If an employee notifies the employer of his/her HSA establishment information by the last day of February, the employer has until April 15 to contribute the comparable contribution amount “plus reasonable interest” for the prior year.

Conclusion

Why wouldn’t an employee who is covered by an HDHP not establish an HSA, especially if his/her employer has indicated that it will make comparable contributions of let’s say for example $500 to an HSA for anyone with self-only HDHP coverage and $1000 for anyone with family HDHP coverage? That is a very good question with no obvious answer. However, an employee will not put the employer in a precarious position as long as the employer follows the notification requirement explained earlier. Employers will want to work with their own Human Resources Department or benefits advisors to develop these procedures. This is not the responsibility of an HSA custodian/trustee; however, an HSA custodian/trustee may consider providing general information to employers, including the previous cited Regulation.

Randy Heidmann
Senior Specialized Consultant, Tax Advantaged Accounts, Compliance Center of Excellence
With more than 40 years of industry experience, Randy Heidmann has helped hundreds of financial organizations create, implement and maintain their tax-advantaged accounts programs.