From the Hotline: Salary Band Based HSA Funding
Question: We have decided to fund health savings accounts (HSAs) based on salary bands. Is that allowable?
Answer: The Internal Revenue Code allows employers to make pretax contributions to employees’ HSAs either through or outside of a cafeteria plan. Employer contributions outside of a cafeteria plan, however, require meeting certain “comparability” tests. Therefore, most employers make HSA contributions only through a cafeteria plan. If the contributions are made outside of a cafeteria plan, the following comparable contribution rules apply:
- Comparable contributions. If you decide to make contributions (outside of a cafeteria plan), you must make comparable contributions to all comparable participating employees’ HSAs. Your contributions are comparable if they are either:
- The same amount, or
- The same percentage of the annual deductible limit under the HDHP covering the employees.
- Comparable participating employees. Comparable participating employees:
- Are covered by your HDHP and are eligible to establish an HSA,
- Have the same category of coverage (either self-only or family coverage), and
- Have the same category of employment (part-time, full-time, or former employees).
If an HSA is established as part of a cafeteria plan, the terms of the cafeteria plan will govern the timing of the employer’s funding obligation. Cafeteria plans are subject to nondiscrimination rules.
HSAs are complex tax-savings arrangements and we encourage you to work with your legal counsel and qualified tax advisor to design and administer your plan in accordance with IRS regulations.