From the Hotline: Advancing Payment of HSA Funds
Question: Would we be allowed to accelerate or advance payment of health savings account (HSA) funds into employees’ HSA accounts based on medical need as it arises?
Answer: Accelerating or advancing employer contributions to health savings account (HSA) funds is a complex topic and would be subject to the requirements set forth for these accounts. HSAs are not health plans but rather are tax-preferred savings accounts. Contributions may be made by the taxpayer (employee) and/or the employer in accordance with IRS regulations. Total contributions cannot exceed the annual statutory limits and the employee must be HSA-eligible (e.g., enrolled in a qualifying high deductible health plan; not covered by any disqualifying health plan; not be the tax dependent of another person; and not enrolled in Medicare). HSAs are individually-owned accounts. Once the employer contribution is deposited to the employee’s HSA, the amount is the property of the accountholder (employee) to use at his or her sole discretion.
Employer contributions to HSAs are subject to IRS provisions intended to prevent the employer from discriminating in favor of certain employees. If your contributions to HSAs are made through a cafeteria plan, Internal Revenue Code § 125 nondiscrimination rules apply that prohibit the employer from discriminating in favor of highly-compensated employees or key employees. To ensure compliance, a series of nondiscrimination “tests” must be performed based on the plan design and actual participation data. Employers often engage the services of legal counsel or third-party administrators to review proposed plan designs before implementation and to conduct annual nondiscrimination testing.
If, on the other hand, employer contributions to HSAs are made outside of a cafeteria plan, then different rules — called “comparability rules” — apply. This means that the employer’s contributions must be comparable for all comparable participating employees. Contributions are comparable if they are either (a) the same amount, or (b) the same percentage of the annual deductible limit under the high deductible health plan (HDHP) covering the employees. You may choose to contribute the same dollar amount for all participating employees, or may choose to contribute one dollar amount for those with self-only HDHP coverage and a different dollar amount for those with family HDHP coverage. The comparability rules do not permit other variations.
The IRS rules do not prevent the employer from changing or discontinuing its contributions during the year, provided the plan continues to comply with the nondiscrimination rules or comparability rules, as applicable. In your case, however, you want to “accelerate contributions” for some employees with medical needs but not for other employees. The IRS rules for employer HSA contributions outside a cafeteria plan do permit accelerated contributions, but certain procedures must be followed. Specifically, you are permitted to accelerate your contribution for an employee who has incurred qualified medical expenses in excess of your normal cumulative contribution at that time. You must establish reasonable uniform methods to determine the employee’s medical expenses and make the accelerated contribution. Further, if you accelerate your contribution to any employee’s HSA, equal accelerated contributions must be available to other employees throughout the same year. For these reasons, we recommend that you review this matter with legal counsel before making any decisions about changing contributions this year.
For reference, below is an excerpt of the pertinent IRS regulation (26 C.F.R. 54.4980G-4):
Q-15: For any calendar year, may an employer accelerate part or all of its contributions for the entire year to the HSAs of employees who have incurred, during the calendar year, qualified medical expenses (as defined in section 223(d)(2)) exceeding the employer’s cumulative HSA contributions at that time?
A-15: (a) In general, yes. For any calendar year, an employer may accelerate part or all of its contributions for the entire year to the HSAs of employees who have incurred, during the calendar year, qualified medical expenses exceeding the employer’s cumulative HSA contributions at that time. If an employer accelerates contributions to the HSA of any such eligible employee, all accelerated contributions must be available throughout the calendar year on an equal and uniform basis to all such eligible employees. Employers must establish reasonable uniform methods and requirements for accelerated contributions and the determination of medical expenses.
(b) Satisfying comparability. An employer that accelerates contributions to the HSAs of its employees will not fail to satisfy the comparability rules because employees who incur qualifying medical expenses exceeding the employer’s cumulative HSA contributions at that time have received more contributions in a given period than comparable employees who do not incur such expenses, provided that all comparable employees receive the same amount or the same percentage for the calendar year. Also, an employer that accelerates contributions to the HSAs of its employees will not fail to satisfy the comparability rules because an employee who terminates employment prior to the end of the calendar year has received more contributions on a monthly basis than employees who work the entire calendar year. An employer is not required to contribute reasonable interest on either accelerated or non-accelerated HSA contributions. . . .
Source: Internal Revenue Bulletin, May 19, 2008, T.D. 9393