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August 16, 2006

IRS guidance on HSA contributions should promote HSA use with HDHPs

David Harlow

The IRS recently finalized its latest guidance on health savings accounts (HSAs), effective January 1, 2007.  (Additional IRS guidance on HSAs may be found here.)  Employers now have clear guideposts for funding voluntary employer contributions to HSAs, including contributions made through cafeteria plans.  The IRS noted in its explanation of these regulations:

Numerous commentators requested guidance on the exception to the comparability rules for employer contributions made through a section 125 cafeteria plan. In response to these comments, the final regulations . . . provide that employer contributions to employees’ HSAs are made through the cafeteria plan if under the written cafeteria plan, the employees have the right to elect to receive cash or other taxable benefits in lieu of all or a portion of an HSA contribution (i.e., all or a portion of the HSA contributions are available as pretax salary reduction amounts), regardless of whether an employee actually elects to contribute any amount to the HSA by salary reduction. The final regulations also provide several examples that illustrate the application of the cafeteria plan exception to the comparability rules.

Other issues addressed include an exception for employees covered collective bargaining agreements, guidance on health screenings and wellness programs, and rules on tracking down former employees for purposes of maintaining comparability of contributions.

The expectation is that these guidelines will promote the propagation of high deductible health plans (HDHPs) in conjunction with HSAs, now that there is greater clarity on the comparability rules, and therefore less risk of incurring a 35% penalty for doing something noncomparable. 

However, some employers remain dubious and have not -- and will not -- shift to HDHPs, reasoning that employees will balk at the limited provider panels associated with HDHPs and really will not relish the opportunity to write checks paying for health care services out of their HSAs. 

At the same time, there are various "HSA improvement" legislative initiatives in play (supported by the banking industry, which has an interest in greater acceptance of HSAs) that would allow for contributions to pre-existing plans -- like flexible spending accounts -- to be rolled over into HSAs without penalty.

Even though 2007 health plan decisions have already been locked in by some employers, it stands to reason that the number of people covered by HDHPs and HSAs will increase dramatically in the coming year or so.

It may be only a matter of time before employers and employees grow more comfortable with this new paradigm.


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