On August 25, 2005, IRS released the HSA comparability rule guidance we have been expecting. However, this comprehensive guidance holds a few surprises that we were not expecting. Some of the highlights of this guidance are as follows:

The scope of the potential plan exception to the HSA comparability rule is severely constricted.   Plan sponsors who offer HSA incentives or vary HSA contribution for cafeteria plan funded HDHP coverage should pay close attendance to this interpretation. Under this interpretation, benefit programs (including wellness and disease management programs) that provide additional HSA credits may not be permissible unless the HSA credits can also be received as cash. Also, an employer who restricts HSA contributions to those who elect HDHP coverage through the cafeteria plan may not be able to escape the comparability rule (unless perhaps the employee also contributes to the HSA with pre-tax dollars).( See 54.4980G-5 Q/A 3 & 4.)

The comparability rule applies to current and former employees (other than COBRA participants). This guidance confirms that you do not have to contribute to a former employee's HSA solely because you are contributing to the HSAs of active employees. You can treat the current and former employees as two separate categories of employees and consequently test them separately under the comparability rule. Also, if an employer contributes to the HSA's of those with self-only coverage, the employer does not have to contribute to the HSAs of those with family coverage. The guidance also confirms that there is no separate category for employees subject to a collective bargaining agreement so differences cannot be made based on CBA status. (See 54.4980G-3 Q/A 5 & 10.)

HSA contributions need not be made for employees that fail to open an HSA before the end of the calendar year.  However, if the HSA is established by December 31st, HSA contributions for all months in which the individual was an eligible individual must be made. (See 54.4980G-4 Q/A 6.)

Guidance is provided on the manner in which contributions can be made. The guidance includes the proper application on funding methods, such as pre-funding the HSA, pay as you go, or pay at the end of the year. (See 54.4980G-4 Q/A 4.)

Guidance is provided on the contribution requirements where both a husband and wife are employed by the same employer and each have an HSA.  According to this guidance, if the employer limits HSA contributions to the HSAs of employees covered under the employer's HDHP, then the employer need only contribute to the HSA of the married employee covered as a "participant". However, if the HSA contributions are not restricted to the HSAs of employees covered by the employer's HDHP or each spouse is covered as a participant, the employer must contribute to the HSA of both spouses.

Click here to see the Treasury's press release.

Click here to see the Prop. Treas. Reg. Secs. 54.4980G-1 through 54.4980G-5 (Aug. 26, 2005).