IRS Plans To Issue New Employer Guidance To Speed Adoption

Some long-awaited Health Savings Account guidance for employers is expected from the IRS.

They will make it easier to offer the plans and make voluntary contributions to encourage participation.

HSAs allow employees to set aside cash tax free, often with matching contributions from employers, to pay for their out-of-pocket medical care. For employees to get the tax benefits, the HSAs must be combined with a high-deductible insurance policy.

Because premiums are lower than for other forms of health insurance, many firms are eager to have employees try this relatively new option.

The proposed IRS rules apply to two specific situations:

·  When an employee fails to establish an HSA by Dec. 31 (or when the worker sets up an HSA but fails to notify the employer).

·  When an employer wants to speed up contributions to an account because the employee has incurred medical expenses greater than the amount available in the account.

The rules will mandate that employers send out a notice by Jan. 15 to all workers who haven't registered an HSA with the firm. The notice will make it clear that, to be eligible for matching contributions, the worker has until the end of February to set up an account and inform the employer. The employer then has until April 15 to make any contribution due for the past year plus "reasonable" interest.

Employers, who normally make contributions each pay period, just as workers usually do, will have the option to make early contributions, up to the annual limit, if the worker incurs expenses early in the year that exceed the account's balance. In some ways, this is similar to the arrangement for flexible spending accounts (FSAs), which require that employers make workers' full annual amounts available Jan. 1 of the plan year, essentially loaning the money to the account if needed and collecting later through payroll deductions. The difference is that for HSAs, the rules apply only to employer contributions. There is no fronting of future worker contributions. And the early contributions to HSAs are voluntary as long as the company has a consistent policy for all workers. If an employer chooses to speed up contributions for one employee, the employer must do it for all workers in similar situations.
This should make HSAs more attractive to workers who have expressed concern about what happens during their first year of participation in an HSA if funds aren't available in the account to cover expenses. In most cases, it will probably become less of a concern as time passes because funds not used one year roll over to the next, so after several years of participation, there will often be a sizable sum in the accounts.

The new IRS rules will affect mostly small to medium-size employers. Most large employers that offer HSAs to their workers make pretax contributions through a Section 125 cafeteria plan, and these issues have already been addressed for those plans. Small and midsize firms usually view Section 125 plans as being too expensive or difficult to administer.

Employers can rely on the rules now, even though they are not finalized yet. The full text of the rule is available at www.treas.gov/offices/public-affairs/hsa/.

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