Overview Of Recent Legislative and Regulatory Guidance Concerning Health Savings Accounts ("HSAs")
Since 2003, individuals who participate in a "high deductible health plan" ("HDHP") sponsored by their employers have been able to make contributions to a Health Savings Account ("HSA"). The advantages of having an HSA include the ability to withdraw the funds held in HSAs on a tax-free basis so long as such withdrawals are used to pay "qualified health care expenses" incurred by the account holder. In addition, the earnings from the investment of the funds held in an HSA accrue on a tax-free basis.
Most of the guidance regarding HSAs was contained in two Notices issued by the Internal Revenue Service ("IRS") that were issued in 2004 (IRS Notice 2004-2 and 2004-50) and in proposed regulations issued by the IRS in August, 2005 (the "Proposed HSA Regulations"). However, over the past year, there has been additional legislation and regulatory guidance issued by the IRS that have made significant changes to the rules governing the administration of HSAs. Below is a summary of the changes to HSA arrangements which were addressed in this recent guidance.
Update on Comparability Requirements for Employer Contributions to HSAs
The Proposed HSA Regulations provided guidance concerning the rule (the "Comparability Rule") that requires employers who sponsor an HDHP and contribute to the HSA accounts established for the employees who participate in the employer's HDHP make the same level of contributions to the employees who are in the same category of employment with the employer (i.e., full-time, part-time, etc.) and have the same category of HDHP coverage (i.e., single, family, etc.). In October, 2006, the above-referenced proposed regulations were finalized by the IRS (referred to herein as the "Final Comparability Rule Regulations").
The Final Comparability Rule Regulations expanded the categories of HDHP coverage that could justify different contributions for employees who fell into such categories. Under the proposed regulations, the only categories were single and family coverage. However, under the Final Comparability Rule Regulations, the family coverage category was expanded to include self plus one, self plus two or self plus three or more coverage. Thus, under the Final Comparability Rule Regulations, an employer who sponsors an HDHP can make different contributions to the HSA accounts of employees who elect family coverage based on the size of the employee's family. However, the Final Comparability Rule Regulations do not permit contributions for the self plus two category to be less than the self plus one category nor the self plus three or more category to be less than the self plus two category. In addition, full time, part time and former employees can be tested separately to determine if the employer contributions to such categories of employees meet the requirements of the Comparability Rule.
The Final Comparability Rule Regulations also clarified that the Comparability Rule did not apply in situations where the employer contributions to HSA accounts of the employees who participate in the employer's HDHP were made through a "cafeteria plan" established by the employer under Section 125 of the Internal Revenue Code (the "Code"). Thus, under the Final Comparability Rule Regulations, an employer who sponsors an HDHP can make matching contributions to HSA accounts based on employee contributions to their HSA account or can make employer contributions contingent on the employee's participation in certain wellness programs even if such contribution strategies would be prohibited under the Comparability Rule so long as such contributions are made through the employer's cafeteria plan. This exception to the applicability of the Comparability Rule applies regardless of whether employees elect to make contributions to their HSA account so long as they have the opportunity to do so. However, the employer contributions made to HSA accounts of the employees who participate in the employer's HDHP through a cafeteria plan shall be subject to the non-discrimination rules applicable to employer contributions to cafeteria plans.
Summary of Additional Legislative Changes to HSA Statutory Provisions
The HSA statutory rules were codified into a new Section 223 of the Code in 2003. However, the Tax Relief and Health Care Act of 2006 (the "Act"), which was passed by Congress and signed into law by President Bush on December 20, 2006, modified various statutory provisions governing HSAs.
Under Section 223 of the Code, the annual HSA contribution limit applicable to HSA accounts was initially the lesser of a specified dollar amount (as indexed on an annual basis for inflation) or the amount of the applicable deductible under the HDHP. However, the Act amended this contribution limitation provision to provide that persons who are eligible to maintain HSA accounts could elect to have an amount up to the maximum annual amount provided by law be deposited in their HSA accounts during such year regardless of the annual deductible limit of their related HDHP. This change became effective as of January 1, 2007. Based on the provisions of the Act, participants in an HDHP with single coverage are now permitted to contribute up to $2,850 and participants with family coverage under an HDHP are now permitted to contribute up to $5,650 to their HSA account per year. The Act also changed the timing of the annual indexing of the HSA contribution limit such that the limit for the next calendar year would be issued in June of the preceding year. The IRS has issued Revenue Procedure 2007-36 which provides that the contribution limits for 2008 will be $2,900 for participants in an HDHP with single coverage and $5,800 for participants in an HDHP with any applicable category of family coverage.
In addition to changing the annual contribution limits for HSA accounts, the Act permitted a one-time tax-free rollover of health flexible spending account and health reimbursement account balances into an HSA account, as well as transfers of amounts from an IRA account equal to the annual HSA contribution limit so long as the person making the rollover remains a person eligible to maintain an HSA account (i.e., a participant in an HDHP) for at least twelve (12) months after the rollover occurs. The Act also relaxed certain eligibility requirements as they relate to (i) employees who become eligible to participate in the HDHP after the beginning of the year such that these employees will be able to make a full year of tax-free contributions to their HSA account and (ii) employees who have health flexible spending accounts who were generally not eligible to have an HSA account under the initial statutory provisions so long as such persons remain eligible to maintain an HSA account for a consecutive twelve month period. Furthermore, the Act modified the Comparability Rule to permit employers who sponsor HDHPs to make greater contributions to the accounts of non-highly compensated employees who maintain HSA accounts.
Clarification of Exemption of HSA Accounts from ERISA Requirements
The IRS Notices referenced above provided that HSA accounts are generally not subject to the requirements of ERISA even if the employer who sponsors an HDHP makes contributions to HSA accounts of employees who participate in the employer's HDHP. The prior guidance provided that the requirements of ERISA, such as the ERISA disclosure and fiduciary rules which are applicable to most employer-sponsored benefit plans, would not apply so long as the employer's involvement with the administration of the HSA accounts is limited to making the employer contributions.
In October, 2006, the Department of Labor ("DOL") issued its Field Assistance Bulletin 2006-2 ("FAB 2006-2) which provided further guidance on the scope of activities in which an employer could engage which would not cause the HSA accounts of the employees participating in the employer's HDHP to be subject to ERISA. Under FAB 2006-2, the DOL stated that employers could (i) open an HSA account and deposit funds without the employee's consent, (ii) limit the institutions to which the employer will forward HSA contributions, (iii) limit the investments in the employee HSA accounts to the same investment options as are available under the employer's 401(k) plan and (iv) pay HSA account fees on behalf of its employees without making the employee HSA accounts subject to ERISA.
Summary of Additional Proposed IRS Regulations Affecting HSA Accounts
When the Final Comparability Rule Regulations were issued, the IRS specifically reserved comment on the issue concerning the compliance with the Comparability Rule where employees who are eligible to establish HSA accounts do not open such accounts before the end of the calendar year in which an employer agreed to make a contribution to all eligible employee HSA accounts. However, on June 1, 2007, the IRS issued proposed regulations (the "2007 Proposed HSA Regulations") which provide that, so long as the employer provides notice to all such employees by January 15 of the year following the end of the calendar year in which the employer contribution is due that they are eligible to receive an employer contribution so long as their HSA account is opened by February 28 of that year, the failure to make contributions on behalf of such employees who do not open their HSA accounts within the required time frame would not violate the Comparability Rule. The 2007 Proposed HSA Regulations include a model notice for this purpose.
The 2007 Proposed HSA Regulations also addressed the ability of an employer to accelerate its HSA contributions for the applicable calendar year on behalf of employees who incur qualified medical expenses in excess of their HSA account balances. Under most HDHP arrangements where employers make contributions to the HSA accounts of the plan participants, the employer contributions are made on a periodic basis during the calendar year or at the end of each year and could result in plan participants incurring medical expenses that will exceed the balances in their HSA accounts. Under the 2007 Proposed HSA Regulations, the IRS would permit an employer to accelerate the timing of the employer contributions for participants in the HDHP that incur medical expenses in excess of the HSA account balances during the year so long as the employer does so on a non-discriminatory basis.
The IRS scheduled hearings on the provisions of the 2007 Proposed HSA Regulations for September 27, 2007 and these regulations will not be effective until they are published in final form by the IRS. However, the 2007 Proposed HSA Regulations provide that employers are entitled to rely on the provisions of the 2007 Proposed HSA Regulations if they so choose.
If you have any questions regarding the new guidance concerning HSAs, please contact a member of our Labor and Employment Practice Group.
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