Question: What are the main rules that apply to employer HSA contributions?
Short Answer: While employers have broad discretion in designing an employer HSA contribution strategy, they should be aware of five main considerations detailed below.
Employer HSA Contribution Consideration #1: Applied to Contribution Limit
Both employer and employee HSA contributions apply toward the statutory maximum contribution limit. Contributions from any source, including both employer and employee contributions through payroll, count toward the same aggregated limit.
In other words, the HSA HSAcontribution limit is different from the 401(k) contribution rules, which have separate deferral (§402(g)) and aggregate employer annual additions (§415(c)) contribution limits. No similar concept applies to HSA contributions—there is simply one unified annual HSA contribution limit.
The HSA contribution limits are adjusted annually for inflation, currently at the following levels:
2020 Contribution Limits
Individual HDHP Coverage: $3,550
Family HDHP Coverage: $7,100
2021 Contribution Limits
Individual HDHP Coverage: $3,600
Family HDHP Coverage $7,200
Family HDHP coverage includes the employee plus at least one other individual (e.g., spouse, domestic partner, child(ren)) covered.
- A $1,000 catch-up contribution is available for individuals who are at least age 55 by the end of the calendar year. For more details, see our previous post: HSA Catch-Up Contributions.
- For more details on the other HDHP/HSA annual limits, see our Compliance Alert: IRS Releases 2021 Inflation Adjusted Amounts for HSAs.
Employer HSA Contribution Consideration #2: HSA Contribution Interval Set at Employer’s Discretion
Employers may make one up-front lump sum contribution, semiannual contributions, quarterly contributions, monthly contributions, per-pay period contributions, or any other regular interval in between. The employer has full discretion in designing its HSA contribution strategy.
Main Advantages of More Up-Front Funding:
- Avoids employees not having sufficient funds in their HSA early in the plan year to cover the deductible or other out-of-pocket expenses; and
- Entices more employees to enroll in the HDHP because of the confidence in having funds available for expenses incurred early in the plan year.
Main Disadvantages of More Up-Front Funding:
- Nonforfeitable contributions means no ability to claw back contributions if an employee terminates or changes plans mid-year (potentially resulting in an employee windfall); and
- Can result in contributions in excess of the proportional contribution limit for a partial year of HSA eligibility if the employee loses HSA eligibility mid-year.
- For more details on the nonforfeitable status of employer HSA contributions, including three limited exceptions for mistaken contributions, see our previous post: HSA Mistaken Contributions.
- For more details on the contribution limit that applies for a partial year of HSA eligibility, and the potential for excess contributions with up-front funding, see our previous post: The HSA Proportional Contribution Limit.
- Where employees enroll in the HDHP or change HDHP coverage tiers mid-year, employer policy will also determine whether to prorate employer HSA contributions for the remainder of the plan year. Not prorating creates the same potential for excess contributions as with up-front funding.
Employer HSA Contribution Consideration #3: Included in Form W-2 Reporting
Employers must report all employer and employee HSA contributions made through payroll as a single aggregated amount on the employee’s Form W-2 in Box 12 using code W.
This reporting includes the employer contribution amount and the amounts contributed by employees pre-tax through payroll (via the Section 125 cafeteria plan).
- Kyle is HSA-eligible with family HDHP coverage for all of 2020.
- Kyle’s employer contributes $3,000 to his HSA in 2020.
- Kyle contributes $4,100 to his HSA on a pre-tax basis through his employer’s Section 125 cafeteria plan in 2020.
- The employer must report both the employer and employee HSA contributions as a single aggregated amount in Box 12 using Code W.
- Box 12 of Kyle’s 2020 Form W-2 will show $7,100 in combined employer/employee HSA contributions with Code W.
- For more details on W-2 reporting, including prior-year contribution corrections, see our previous post: HSA Form W-2 Reporting.
- California and New Jersey do not conform the federal tax-advantaged treatment of HSAs. For more details, see our previous post: California and New Jersey HSA State Income Tax.
Employer HSA Contribution Consideration #4: Limited Role in Determining HSA Eligibility
HSA eligibility is generally an individual income tax issue that does not involve the employer. Therefore, with limited exceptions, the employer is not responsible for determining the HSA-eligible status of employees.
Employers are responsible for confirming only the following three items with respect to an employee’s HSA eligibility:
- Whether the employee is covered by an HDHP sponsored by that employer;
- Whether the employee has any disqualifying coverage sponsored by that employer; and
- The employee’s age for determining eligibility for catch-up contributions.
Employers may rely on employees’ representations as to their date of birth.
Most importantly, employers are not responsible for determining or monitoring whether employees have any outside disqualifying coverage. For example, this means it is not the employer’s responsibility to verify:
- Whether the employee is enrolled in non-HDHP coverage through a spouse, domestic partner, or parent;
- Whether the employee’s spouse is enrolled in a general purpose health FSA (which disqualifying coverage for both the spouse and employee); or
- Whether the employee is enrolled in any part of Medicare.
Any such disqualification coverage issues related to a plan not sponsored by the employer are exclusively the employee’s responsibility because they are purely an individual income tax issue.
- For more details on how a spouse’s general purpose health FSA enrollment is disqualifying coverage for both the employee and spouse, see our previous post: Health FSA Interaction with HSA.
- For more details on how Medicare enrollment (but not mere eligibility!) is disqualifying coverage, see our previous post: How Medicare Affects HSA Eligibility.
- The $1,000 catch-up contribution is available for individuals who are at least age 55 by the end of the calendar year. For more details, see our previous post: HSA Catch-Up Contributions.
Employer HSA Contribution Consideration #5: Section 125 Nondiscrimination Rules Typically Apply
Employer HSA contributions are subject to one of two sets of nondiscrimination rules:
- The comparability rules of IRC §4980G; or
- The cafeteria plan nondiscrimination rules for IRC §125.
Where employees are permitted to contribute to the HSA through payroll on a pre-tax basis via the company’s cafeteria plan, the employer’s contributions are not subject to the comparability rules.
The HSA comparability rules do not apply to employer contributions made through a cafeteria plan. The comparability regulations, cafeteria plan regulations, and other IRS guidance all make clear that employer contributions to an employee’s HSA are made “through a cafeteria plan” where employees may contribute to the HSA on a pre-tax basis through the cafeteria plan by salary reduction.
Therefore, virtually all employer HSA contributions are subject to the §125 cafeteria plan nondiscrimination rules (rather than the §4980G comparability rules) because almost all employers permit employees to make pre-tax HSA contributions through payroll.
It is relatively easy for employers to satisfy the Section 125 nondiscrimination rules. The primary requirement is that employers satisfy the “uniform election” component of the contributions and benefits test. This generally requires that employers provide at least as generous HSA contributions for non-highly compensated participants as made available for highly compensated participants.
- For more details on the interaction between the comparability rules and the Section 125 nondiscrimination rules, see our previous post: HSA Nondiscrimination Rules.
- For more details on the Section 125 contributions and benefits test, see our previous post: Nondiscrimination Rules for Health Plan Contribution Structures.
- For more details on the Section 125 nondiscrimination rules generally, see our previous post: Cafeteria Plan Nondiscrimination Tests.
Reminder: Employer Designates HSA Custodian for Payroll Contributions
Employers almost always require that employees establish an HSA with the employer’s designated HSA custodian to make or receive HSA contributions through payroll.
While it is possible for employers to permit employees to make or receive HSA contribution through payroll into any HSA custodian of the employee’s choosing, very few employers offer this option because it presents significant administrative challenges. However, employees can freely move their HSA funds to any other HSA custodian via a rollover or transfer.
- For more details on the ability of employees to roll over or transfer HSA funds from the employer’s designated HSA custodian to the employee’s a preferred HSA custodian, see our previous post: Employee HSA Rollovers and Transfers.
- For more details on what happens if an employee fails to timely establish an HSA with the employer’s designated HSA custodian, see our previous post: Employee Fails to Establish HSA.
- For more details on the requirements to establish an HSA, as well as the consequences associated with the establishment date, see our previous post: HSA Establishment Date.
For more details on everything HDHP/HSA, see our ABD 2020 Go All the Way With HSA Guide.
IRS Publication 969:
You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. This includes amounts contributed to your account by your employer through a cafeteria plan.
IRS Form W-2 Instructions:
W—Employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to your health savings account. Report on Form 8889, Health Savings Accounts (HSAs).
IRS Notice 2004-50:
Q-81. Are employers who contribute to an employee’s HSA responsible for determining whether the employee is an eligible individual and the employee’s maximum annual contribution limit?
A-81. Employers are only responsible for determining the following with respect to an employee’s eligibility and maximum annual contribution limit on HSA contributions: (1) whether the employee is covered under an HDHP (and the deductible) or low deductible health plan or plans (including health FSAs and HRAs) sponsored by that employer; and (2) the employee’s age (for catch-up contributions). The employer may rely on the employee’s representation as to his or her date of birth.
Q-82. May the employer recoup from an employee’s HSA any portion of the employer’s contribution to the employee’s HSA?
A-82. No. Under section 223(d)(1)(E), an account beneficiary’s interest in an HSA is nonforfeitable. For example, on January 2, 2005, the employer makes the maximum annual contribution to employees’ HSAs, in the expectation that the employees would work for the entire calendar year 2005. On February 1, 2005, one employee terminates employment. The employer may not recoup from that employee’s HSA any portion of the contribution previously made to the employee’s HSA.
(E) The interest of an individual in the balance in his account is nonforfeitable.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).