[Federal Register Volume 70, Number 165 (Friday, August 26, 2005)]
[Proposed Rules]
[Pages 50233-50244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-16941]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG-138647-04]
RIN 1545-BE30


Employer Comparable Contributions to Health Savings Accounts 
Under Section 4980G

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations providing guidance 
on employer comparable contributions to Health Savings Accounts (HSAs) 
under section 4980G. In general, these proposed regulations would 
affect employers that contribute to employees' HSAs.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 25, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138647-04), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
138647-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the IRS Internet site at www.irs.gov/regs 
or via the Federal eRulemaking Portal at www.regulations.gov (IRS-REG-
138647-04).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

[[Page 50234]]

Barbara E. Pie at (202) 622-6080; concerning submissions of comments or 
a request for a public hearing, Kelly Banks at (202) 622-7180 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed Pension Excise Tax Regulations (26 
CFR part 54) under section 4980G of the Internal Revenue Code (Code). 
Under section 4980G of the Code, an excise tax is imposed on an 
employer that fails to make comparable contributions to the HSAs of its 
employees.
    Section 1201 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (Act), Public Law 108-173, (117 Stat. 2066, 
2003) added section 223 to the Code to permit eligible individuals to 
establish HSAs for taxable years beginning after December 31, 2003. 
Section 4980G was also added to the Code by the Act. Section 4980G(a) 
imposes an excise tax on the failure of an employer to make comparable 
contributions to the HSAs of its employees for a calendar year. Section 
4980G(b) provides that rules and requirements similar to section 4980E 
(the comparability rules for Archer Medical Savings Accounts (Archer 
MSAs)) apply for purposes of section 4980G. Section 4980E(b) imposes an 
excise tax equal to 35% of the aggregate amount contributed by the 
employer to the Archer MSAs of employees during the calendar year if an 
employer fails to make comparable contributions to the Archer MSAs of 
its employees in a calendar year. Therefore, if an employer fails to 
make comparable contributions to the HSAs of its employees during a 
calendar year, an excise tax equal to 35% of the aggregate amount 
contributed by the employer to the HSAs of its employees during that 
calendar year is imposed on the employer. See Sections 4980G(a) and (b) 
and 4980E(b). See also Notice 2004-2 (2004-2 I.R.B. 269), Q & A-32.

Explanation of Provisions

Overview

    The proposed regulations clarify and expand on the guidance 
regarding the comparability rules published in Notice 2004-2 and in 
Notice 2004-50 (2004-33 I.R.B. 196), Q & A-46 through Q & A-54.

I. Comparable Contributions in General

    An employer is not required to contribute to the HSAs of its 
employees. However, in general, if an employer makes contributions to 
any employee's HSA, the employer must make comparable contributions to 
the HSAs of all comparable participating employees. Comparable 
participating employees are eligible individuals (as defined in section 
223(c)(1)) who have the same category of high deductible health plan 
(HDHP) coverage. The categories of coverage are self-only HDHP coverage 
and family HDHP coverage.
    These proposed regulations incorporate the rule in Notice 2004-2, Q 
& A-32 that contributions are comparable if they are either the same 
amount or the same percentage of the deductible for employees who are 
eligible individuals with the same category of coverage. An employer is 
not required to contribute the same amount or the same percentage of 
the deductible for employees who are eligible individuals with self-
only HDHP coverage that it contributes for employees who are eligible 
individuals with family HDHP coverage. An employer that satisfies the 
comparability rules by contributing the same amount to the HSAs of all 
employees who are eligible individuals with self-only HDHP coverage is 
not required to contribute any amount to the HSAs of employees who are 
eligible individuals with family HDHP coverage, or to contribute the 
same percentage of the family HDHP deductible as the amount contributed 
with respect to self-only HDHP coverage. Similarly, an employer that 
satisfies the comparability rules by contributing the same amount to 
the HSAs of all employees who are eligible individuals with family HDHP 
coverage is not required to contribute any amount to the HSAs of 
employees who are eligible individuals with self-only HDHP coverage, or 
to contribute the same percentage of the self-only HDHP deductible as 
the amount contributed with respect to family HDHP coverage.

II. Calculating Comparable Contributions

    The proposed regulations clarify that contributions to the HSAs of 
certain individuals are not taken into account in determining whether 
an employer's contributions to the HSAs of its employees satisfy the 
comparability rules. Specifically, contributions to the HSAs of 
independent contractors, sole proprietors, and partners in a 
partnership are not taken into account under the comparability rules. 
In addition, the comparability rules do not apply to amounts rolled 
over from an employee's HSA or Archer MSA or to after-tax employee 
contributions.
    The proposed regulations also clarify that the categories of 
employees for comparability testing are current full-time employees, 
current part-time employees, and former employees (except for former 
employees with coverage under the employer's HDHP because of an 
election under a COBRA continuation provision (as defined in section 
9832(d)(1)). The proposed regulations provide that the comparability 
rules apply separately to each of the categories of employees. If an 
employer contributes to the HSA of any employee in a category of 
employees, the employer must make comparable contributions to the HSAs 
of all comparable participating employees within that category. 
Therefore, the comparability rules apply to a category of employees 
only if an employer contributes to the HSA of any employee within the 
category. For example, an employer that makes comparable contributions 
to the HSAs of all full-time employees who are eligible individuals but 
does not contribute to the HSA of any employee who is not a full-time 
employee, satisfies the comparability rules.
    The categories of employees set forth in these proposed regulations 
are the exclusive categories for comparability testing. An employer 
must make comparable contributions to the HSAs of all comparable 
participating employees (eligible individuals who are in the same 
category of employees with the same category of HDHP coverage) during 
the calendar year without regard to any classification other than these 
categories. Therefore, the comparability rules do not apply separately 
to groups of collectively bargained employees. While the comparability 
rules apply separately to part-time employees, there is no similar rule 
permitting separate application of the comparability rules to 
collectively bargained employees. Neither section 4980E nor section 
4980G provides an exception to the comparability rules for collectively 
bargained employees. Accordingly, an employer must make comparable 
contributions to the HSAs of all comparable participating employees, 
both those who are covered under a collective bargaining agreement and 
those who are not covered. Similarly, the comparability rules do not 
apply separately to management and non-management employees.
    The proposed regulations also provide that the comparability rules 
apply separately to employees who have HSAs and employees who have 
Archer MSAs. However, if an employee has both an HSA and an Archer MSA, 
the employer may contribute to either the HSA or the Archer MSA, but 
not to both.

[[Page 50235]]

    The proposed regulations incorporate the rule set forth in Q & A-53 
of Notice 2004-50, which provides that if an employer limits HSA 
contributions to employees who are eligible individuals with coverage 
under an HDHP provided by the employer, the employer is not required to 
make comparable contributions to the HSAs of employees who are eligible 
individuals with coverage under an HDHP not provided by the employer. 
However, if an employer contributes to the HSAs of employees who are 
eligible individuals with coverage under any HDHP, in addition to the 
HDHPs provided by the employer, the employer is required to make 
comparable contributions to the HSAs of all comparable participating 
employees whether or not covered under employer's HDHP. The proposed 
regulations also provide that similar rules apply to employer 
contributions to the HSAs of former employees. For example, if an 
employer limits HSA contributions to former employees who are eligible 
individuals with coverage under an HDHP provided by the employer, the 
employer is not required make comparable contributions to the HSAs of 
former employees who are eligible individuals with coverage under an 
HDHP not provided by the employer. However, if an employer contributes 
to the HSAs of former employees who are eligible individuals with 
coverage under the employer's HDHP, the employer is not required to 
make comparable contributions to the HSAs of former employees who are 
eligible individuals with coverage under the employer's HDHP because of 
an election under a COBRA continuation provision (as defined in section 
9832(d)(1)).
    The proposed regulations also incorporate the rule set forth in Q & 
A-46 of Notice 2004-50, which provides that the comparability rules 
will not be satisfied if an employer makes HSA contributions in an 
amount equal to an employee's HSA contribution or a percentage of the 
employee's HSA contribution (matching contributions) because if all 
comparable participating employees do not contribute the same amount to 
their HSAs, they will not receive comparable contributions to their 
HSAs. In addition, the comparability rules will not be satisfied if an 
employer conditions contributions to an employee's HSA on an employee's 
participation in health assessments, disease management programs or 
wellness programs because if all comparable participating employees do 
not elect to participate in all the programs, they will not receive 
comparable contributions to their HSAs. See Q & A-48 of Notice 2004-50. 
Similarly, the comparability rules will not be satisfied if an employer 
makes additional contributions to the HSAs of all comparable 
participating employees who have attained a specified age or who have 
worked for the employer for a specified number of years, because if all 
comparable participating employees do not meet the age or length of 
service requirement, they will not receive comparable contributions to 
their HSAs. See Q & A-50 of Notice 2004-50.

III. Procedures for Making Comparable Contributions

    The proposed regulations provide that in determining whether the 
comparability rules are satisfied, an employer must take into account 
all full-time and part-time employees who were eligible individuals for 
any month during the calendar year. An employee is an eligible 
individual if as of the first day of the month the employee meets all 
of the requirements set forth in section 223(c). An employer may comply 
with the comparability rules by contributing amounts at one or more 
times for the calendar year to the HSAs of employees who are eligible 
individuals, if contributions are the same amount or the same 
percentage of the HDHP deductible for employees who are eligible 
individuals with the same category of coverage and are made at the same 
time (contributions on a pay-as-you-go basis).
    An employer may also satisfy the comparability rules by determining 
comparable contributions for the calendar year at the end of the 
calendar year, taking into account all employees who were eligible 
individuals for any month during the calendar year and contributing the 
correct amount (a percentage of the HDHP deductible or a specified 
dollar amount for the same categories of coverage) to the employees' 
HSAs by April 15th of the following year (contributions on a look-back 
basis).
    If an employer makes comparable HSA contributions on a pay-as-you-
go basis, it must do so for each comparable participating employee who 
is an employee during the time period used to make contributions. For 
example, if an employer makes HSA contributions each pay period, it 
must do so for each comparable participating employee who is an 
employee during the pay period. If an employer makes comparable 
contributions on a look-back-basis, it must do so for each employee who 
was a comparable participating employee for any month during the 
calendar year.
    In addition, an employer may make all of its contributions to the 
HSAs of employees who are eligible individuals at the beginning of the 
calendar year (contributions on a pre-funded basis). An employer that 
makes comparable HSA contributions on a pre-funded basis 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 HSA 
contributions on a monthly basis than employees who worked the entire 
calendar year. If an employer makes HSA contributions on a pre-funded 
basis, it must do so for all employees who are comparable participating 
employees at the beginning of the calendar year. An employer that makes 
HSA contributions on a pre-funded basis must make comparable HSA 
contributions for all employees who are comparable participating 
employees for any month during the calendar year, including employees 
hired after the date of initial funding.
    If an employee has not established an HSA at the time the employer 
funds its employee's HSAs, the employer complies with the comparability 
rules by contributing comparable amounts to the employee's HSA when the 
employee establishes the HSA, taking into account each month that the 
employee was a comparable participating employee. However, an employer 
is not required to make comparable contributions for a calendar year to 
an employee's HSA if the employee has not established an HSA by 
December 31st of the calendar year.
    The proposed regulations provide that if an employer determines 
that the comparability rules are not satisfied for a calendar year, the 
employer may not recoup from an employee's HSA any portion of the 
employer's contribution to the employee's HSA because under section 
223(d)(1)(E), an account beneficiary's interest in an HSA is 
nonforfeitable. However, an employer may make additional HSA 
contributions to satisfy the comparability rules. An employer may 
contribute up until April 15th following the calendar year in which the 
non-comparable contributions were made. An employer that makes 
additional HSA contributions to correct non-comparable contributions 
must also contribute reasonable interest.

IV. Exception to the Comparability Rules for Cafeteria Plans

    The legislative history of the Act states that the comparability 
rules do not apply to HSA contributions that an employer makes through 
a cafeteria plan. See Conf. Rep. No. 391, 108th Cong., 1st Sess. 843 
(2003), 2004

[[Page 50236]]

U.S.C.C.A.N. 1808. See also Notice 2004-2, Q & A-32. The 
nondiscrimination rules in section 125 of the Code apply to HSA 
contributions (including matching contributions) made through a 
cafeteria plan. Generally, a cafeteria plan is a written plan under 
which all participants are employees and participants may choose among 
two or more benefits consisting of cash and qualified benefits. Unlike 
the cafeteria plan nondiscrimination rules, the comparability rules are 
not based upon discrimination in favor of highly compensated or key 
employees. Therefore, an employer that maintains an HDHP only for 
highly compensated or key employees and makes HSA contributions through 
a cafeteria plan only for those eligible employees, does not violate 
the comparability rules, but may violate the cafeteria plan 
nondiscrimination rules.

V. Waiver of Excise Tax

    In the case of a failure which is due to reasonable cause and not 
to willful neglect, all or a portion of the excise tax imposed under 
section 4980G may be waived to the extent that the payment of the tax 
would be excessive relative to the failure involved. See sections 
4980G(b) and 4980E(c).

Proposed Effective Date

    It is proposed that these regulations apply to employer 
contributions made on or after the date the final regulations are 
published in the Federal Register. However, taxpayers may rely on these 
regulations for guidance pending the issuance of final regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. This notice 
of proposed rulemaking does not impose a collection of information on 
small entities, thus the Regulatory Flexibility Act (5 U.S.C. chapter 
6) does not apply. Pursuant to section 7805(f) of the Code, these 
proposed regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The Treasury Department and the IRS specifically request 
comments on the clarity of the proposed rules and how they can be made 
easier to understand. In addition, comments are requested on the 
application of the comparability rules to employees who are on leave 
pursuant to the Family and Medical Leave Act of 1993, Public Law 103-3, 
(107 Stat. 6, 1993, 29 U.S.C. 2601 et seq.). Comments are also 
requested concerning employer matching HSA contributions made through a 
cafeteria plan. Specifically, whether the ratio of an employer's 
matching HSA contributions to an employee's salary reduction HSA 
contributions should be limited, and whether employer matching 
contributions exceeding a specific limit should be subject to the 
section 4980G comparability rules. All comments will be available for 
public inspection and copying. A public hearing will be scheduled if 
requested in writing by any person that timely submits written 
comments.

Drafting Information

    The principal author of these proposed regulations is Barbara E. 
Pie, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities), Internal Revenue Service. However, personnel from 
other offices of the IRS and Treasury Department participated in their 
development.

List of Subjects in 26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, 26 CFR part 54 is proposed to be amended as follows:

PART 54--PENSION EXCISE TAXES

    Paragraph 1. The authority citation for part 54 is amended by 
adding an entry in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 54.4980G-1 also issued under 26 U.S.C. 4980G. * * *

    Par. 2. Sections 54.4980G-0 through 54.4980G-5 are added to read as 
follows:


Sec.  54.4980G-0  Table of contents.

    This section contains the questions for Sec.  54.4980G-1 through 
Sec.  54.4980G-5.

Sec.  54.4980G-1 Failure of employer to make comparable health 
savings account contributions.

    Q-1. What are the comparability rules that apply to employer 
contributions to Health Savings Accounts (HSAs)?
    Q-2. What are the categories of HDHP coverage for purposes of 
applying the comparability rules?
    Q-3. What is the testing period for making comparable 
contributions to employees' HSAs?
    Q-4. How is the excise tax computed if employer contributions do 
not satisfy the comparability rules for a calendar year?

Sec.  54.4980G-2 Employer contribution defined.

    Q-1. Do the comparability rules apply to amounts rolled over 
from an employee's HSA or Archer Medical Savings Account (Archer 
MSA)?
    Q-2. If an employee requests that his or her employer deduct 
after-tax amounts from the employee's compensation and forward these 
amounts as employee contributions to the employee's HSA, do the 
comparability rules apply to these amounts?

Sec.  54.4980G-3 Definition of employee for comparability testing.

    Q-1. Do the comparability rules apply to contributions that an 
employer makes to the HSAs of independent contractors?
    Q-2. May a sole proprietor who is an eligible individual 
contribute to his or her own HSA without contributing to the HSAs of 
his or her employees who are eligible individuals?
    Q-3. Do the comparability rules apply to contributions by a 
partnership to a partner's HSA?
    Q-4. How are members of controlled groups treated when applying 
the comparability rules?
    Q-5. What are the categories of employees for comparability 
testing?
    Q-6. Is an employer permitted to make comparable contributions 
only to the HSAs of comparable participating employees who have 
coverage under the employer's HDHP?
    Q-7. If an employee and his or her spouse are eligible 
individuals who work for the same employer and one employee-spouse 
has family coverage for both employees under the employer's HDHP, 
must the employer make comparable contributions to the HSAs of both 
employees?
    Q-8. Does an employer that makes HSA contributions only for non-
management employees who are eligible individuals, but not for 
management employees who are eligible individuals or that makes HSA 
contributions only for management employees who are eligible 
individuals but not for non-management employees who are eligible 
individuals satisfy the requirement that the employer make 
comparable contributions?
    Q-9. If an employer contributes to the HSAs of former employees 
who are eligible individuals, do the comparability rules apply to 
these contributions?
    Q-10. Is an employer permitted to make comparable contributions 
only to the HSAs of comparable participating former employees who 
have coverage under the employer's HDHP?
    Q-11. If an employer contributes only to the HSAs of former 
employees who are

[[Page 50237]]

eligible individuals with coverage under the employer's HDHP, must 
the employer make comparable contributions to the HSAs of former 
employees who are eligible individuals with coverage under the 
employer's HDHP because of an election under a COBRA continuation 
provision (as defined in section 9832(d)(1))?
    Q-12. How do the comparability rules apply if some employees 
have HSAs and other employees have Archer MSAs?

Sec.  54.4980G-4 Calculating comparable contributions.

    Q-1. What are comparable contributions?
    Q-2. How do the comparability rules apply to employer 
contributions to employees' HSAs if some employees work full-time 
during the entire calendar year, and other employees work full-time 
for less than the entire calendar year?
    Q-3. How does an employer comply with the comparability rules 
when some employees who are eligible individuals do not work for the 
employer during the entire calendar year?
    Q-4. May an employer make all of its contributions to the HSAs 
of its employees who are eligible individuals at the beginning of 
the calendar year (i.e., on a pre-funded basis) instead of 
contributing on a pay-as-you-go or on a look-back basis?
    Q-5. Must an employer use the same contribution method as 
described in Q & A-3 and Q & A-4 of this section for all employees 
who were comparable participating employees for any month during the 
calendar year?
    Q-6. How does an employer comply with the comparability rules if 
an employee has not established an HSA at the time the employer 
contributes to its employees' HSAs?
    Q-7. If an employer bases its contributions on a percentage of 
the HDHP deductible, how is the correct percentage or dollar amount 
computed?
    Q-8. Does an employer that contributes to the HSA of each 
comparable participating employee in an amount equal to the 
employee's HSA contribution or a percentage of the employee's HSA 
contribution (matching contributions) satisfy the rule that all 
comparable participating employees receive comparable contributions?
    Q-9. If an employer conditions contributions by the employer to 
an employee's HSA on an employee's participation in health 
assessments, disease management programs or wellness programs and 
makes the same contributions available to all employees who 
participate in the programs, do the contributions satisfy the 
comparability rules?
    Q-10. If an employer makes additional contributions to the HSAs 
of all comparable participating employees who have attained a 
specified age or who have worked for the employer for a specified 
number of years, do the contributions satisfy the comparability 
rules?
    Q-11. If an employer makes additional contributions to the HSAs 
of all comparable participating employees who qualify for the 
additional contributions (HSA catch-up contributions) under section 
223(b)(3), do the contributions satisfy the comparability rules?
    Q-12. If an employer's contributions to an employee's HSA result 
in non-comparable contributions, may the employer recoup the excess 
amount from the employee's HSA?

Sec.  54.4980G-5 HSA comparability rules and cafeteria plans and 
waiver of excise tax.

    Q-1. If an employer makes contributions through a section 125 
cafeteria plan to the HSA of each employee who is an eligible 
individual are the contributions subject to the comparability rules?
    Q-2. If an employer makes contributions through a cafeteria plan 
to the HSA of each employee who is an eligible individual in an 
amount equal to the amount of the employee's HSA contribution or a 
percentage of the amount of the employee's HSA contribution (i.e., 
matching contributions), are the contributions subject to the 
section 4980G comparability rules?
    Q-3. If an employer provides HDHP coverage through a cafeteria 
plan, but the employer's HSA contributions are not provided through 
the cafeteria plan, do the cafeteria plan nondiscrimination rules or 
the comparability rules apply to the HSA contributions?
    Q-4. If under the employer's cafeteria plan, employees who are 
eligible individuals and who participate in health assessments, 
disease management programs or wellness programs receive an employer 
contribution to an HSA, unless the employees elect cash, are the 
contributions subject to the comparability rules?
    Q-5. May all or part of the excise tax imposed under section 
4980G be waived?


Sec.  54.4980G-1  Failure of employer to make comparable health savings 
account contributions.

    Q-1. What are the comparability rules that apply to employer 
contributions to Health Savings Accounts (HSAs)?
    A-1. If an employer makes contributions to any employee's HSA, the 
employer must make comparable contributions to the HSAs of all 
comparable participating employees. See Q & A-1 in Sec.  54.4980G-4 for 
the definition of comparable contributions. Comparable participating 
employees are eligible individuals (as defined in section 223(c)(1)) 
who have the same category of high deductible health plan (HDHP) 
coverage. See sections 4980G(b) and 4980E(d)(3). See section 223(c)(2) 
and (g) for the definition of an HDHP. See also Q & A-5 in Sec.  
54.4980G-3 for the categories of employees and Q & A-2 in this section 
for the categories of HDHP coverage.
    Q-2. What are the categories of HDHP coverage for purposes of 
applying the comparability rules?
    A-2. The categories of coverage are self-only HDHP coverage and 
family HDHP coverage. See sections 4980G(b) and 4980E(d)(3)(B).
    Q-3. What is the testing period for making comparable contributions 
to employees' HSAs?
    A-3. To satisfy the comparability rules, an employer must make 
comparable contributions for the calendar year to the HSAs of employees 
who are comparable participating employees. See section 4980G(a).
    Q-4. How is the excise tax computed if employer contributions do 
not satisfy the comparability rules for a calendar year?
    A-4. (a) Computation of tax. If employer contributions do not 
satisfy the comparability rules for a calendar year, the employer is 
subject to an excise tax equal to 35% of the aggregate amount 
contributed by the employer to HSAs for that period.
    (b) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-4:

    Example.  In this Example, assume that the HDHP provided by 
Employer A satisfies the definition of an HDHP for the 2007 calendar 
year. During the 2007 calendar year, Employer A has 8 employees who 
are eligible individuals with self-only coverage under an HDHP 
provided by Employer A. The deductible for the HDHP is $2,000. For 
the 2007 calendar year, Employer A contributes $2,000 each to the 
HSAs of two employees and $1,000 each to the HSAs of the other six 
employees, for total HSA contributions of $10,000. Employer A's 
contributions do not satisfy the comparability rules. Therefore, 
Employer A is subject to an excise tax of $3,500 (i.e., 35% x 
$10,000) for its failure to make comparable contributions to its 
employees' HSAs.


Sec.  54.4980G-2  Employer contribution defined.

    Q-1. Do the comparability rules apply to amounts rolled over from 
an employee's HSA or Archer Medical Savings Account (Archer MSA)?
    A-1. No. The comparability rules do not apply to amounts rolled 
over from an employee's HSA or Archer MSA.
    Q-2. If an employee requests that his or her employer deduct after-
tax amounts from the employee's compensation and forward these amounts 
as employee contributions to the employee's HSA, do the comparability 
rules apply to these amounts?
    A-2. No. Section 106(d) provides that amounts contributed by an 
employer to an eligible employee's HSA shall be treated as employer-
provided coverage for medical expenses and are excludible from the 
employee's gross income up to the limit in section 223(b). After-tax 
employee contributions to an HSA are not subject to the comparability 
rules because they are not employer contributions under section 106(d).

[[Page 50238]]

Sec.  54.4980G-3  Definition of employee for comparability testing.

    Q-1. Do the comparability rules apply to contributions that an 
employer makes to the HSAs of independent contractors?
    A-1. No. The comparability rules apply only to contributions that 
an employer makes to the HSAs of employees.
    Q-2. May a sole proprietor who is an eligible individual contribute 
to his or her own HSA without contributing to the HSAs of his or her 
employees who are eligible individuals?
    A-2. (a) Sole proprietor not an employee. Yes. The comparability 
rules apply only to contributions made by an employer to the HSAs of 
employees. Because a sole proprietor is not an employee, the 
comparability rules do not apply to contributions he or she makes to 
his or her own HSA. However, if a sole proprietor contributes to any 
employee's HSA, he or she must make comparable contributions to the 
HSAs of all comparable participating employees. In determining whether 
the comparability rules are satisfied, contributions that a sole 
proprietor makes to his or her own HSA are not taken into account.
    (b) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-2:

    Example. In a calendar year, B, a sole proprietor is an eligible 
individual and contributes $1,000 to B's own HSA. B also contributes 
$500 for the same calendar year to the HSA of each employee who is 
an eligible individual. The comparability rules are not violated by 
B's $1,000 contribution to B's own HSA.

    Q-3. Do the comparability rules apply to contributions by a 
partnership to a partner's HSA?
    A-3. (a) Partner not an employee. No. Contributions by a 
partnership to a bona fide partner's HSA are not subject to the 
comparability rules because the contributions are not contributions by 
an employer to the HSA of an employee. The contributions are treated as 
either guaranteed payments under section 707(c) or distributions under 
section 731. However, if a partnership contributes to the HSAs of 
employees who are not partners, the comparability rules apply to those 
contributions.
    (b) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-3:

    Example. (i) Partnership X is a limited partnership with three 
equal individual partners, A (a general partner), B (a limited 
partner), and C (a limited partner). C is to be paid $300 annually 
for services rendered to Partnership X in her capacity as a partner 
without regard to partnership income (a section 707(c)) guaranteed 
payment). D and E are the only employees of Partnership X and are 
not partners in Partnership X. A, B, C, D, and E are eligible 
individuals and each has an HSA. During Partnership X's Year 1 
taxable year, which is also a calendar year, Partnership X makes the 
following contributions--
    (A) A $300 contribution to each of A's and B's HSAs which are 
treated as section 731 distributions to A and B;
    (B) A $300 contribution to C's HSA in lieu of paying C the 
guaranteed payment directly; and
    (C) A $200 contribution to each of D's and E's HSAs, who are 
comparable participating employees.
    (ii) Partnership X's contributions to A's and B's HSAs are 
section 731 distributions, which are treated as cash distributions. 
Partnership X's contribution to C's HSA is treated as a guaranteed 
payment under section 707(c). The contribution is not excludible 
from C's gross income under section 106(d) because the contribution 
is treated as a distributive share of partnership income for 
purposes of all Code sections other than sections 61(a) and 162(a), 
and a guaranteed payment to a partner is not treated as compensation 
to an employee. Thus, Partnership X's contributions to the HSAs of 
A, B, and C are not subject to the comparability rules. Partnership 
X's contributions to D's and E's HSAs are subject to the 
comparability rules because D and E are employees of Partnership X 
and are not partners in Partnership X. Partnership X's contributions 
satisfy the comparability rules.

    Q-4. How are members of controlled groups treated when applying the 
comparability rules?
    A-4. All persons or entities treated as a single employer under 
section 414(b), (c), (m), or (o) are treated as one employer. See 
sections 4980G(b) and 4980E(e).
    Q-5. What are the categories of employees for comparability 
testing?
    A-5. (a) Categories. The categories of employees for comparability 
testing are as follows--
    (1) Current full-time employees;
    (2) Current part-time employees; and
    (3) Former employees (except for former employees with coverage 
under the employer's HDHP because of an election under a COBRA 
continuation provision (as defined in section 9832(d)(1)).
    (b) Part-time and full-time employees. Part-time employees are 
customarily employed for fewer than 30 hours per week and full-time 
employees are customarily employed for 30 or more hours per week. See 
sections 4980G(b) and 4980E(d)(4)(A) and (B).
    (c) In general. The categories of employees in paragraph (a) of 
this Q & A-5 are the exclusive categories for comparability testing. An 
employer must make comparable contributions to the HSAs of all 
comparable participating employees (eligible individuals who are in the 
same category of employees with the same category of HDHP coverage) 
during the calendar year without regard to any classification other 
than these categories. Thus, the comparability rules do not apply 
separately to collectively bargained and non-collectively bargained 
employees. Similarly, the comparability rules do not apply separately 
to groups of collectively bargained employees.
    Q-6. Is an employer permitted to make comparable contributions only 
to the HSAs of comparable participating employees who have coverage 
under the employer's HDHP?
    A-6. (a) Employer-provided HDHP coverage. If during a calendar 
year, an employer contributes to the HSA of any employee who is an 
eligible individual covered under an HDHP provided by the employer, the 
employer is required to make comparable contributions to the HSAs of 
all comparable participating employees with coverage under any HDHP 
provided by the employer. An employer that contributes only to the HSAs 
of employees who are eligible individuals with coverage under the 
employer's HDHP is not required to make comparable contributions to 
HSAs of employees who are eligible individuals but are not covered 
under the employer's HDHP. However, an employer that contributes to the 
HSA of any employee who is an eligible individual with coverage under 
any HDHP, in addition to the HDHPs provided by the employer, must make 
comparable contributions to the HSAs of all comparable participating 
employees whether or not covered under the employer's HDHP.
    (b) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-6:

    Example 1. In a calendar year, Employer C offers an HDHP to its 
full-time employees. Most full-time employees are covered under 
Employer C's HDHP and Employer C makes comparable contributions only 
to these employees' HSAs. Employee W, a full-time employee of 
Employer C and an eligible individual, is covered under an HDHP 
provided by W's spouse's employer and not under Employer C's HDHP. 
Employer C is not required to make comparable contributions to W's 
HSA.
    Example 2. In a calendar year, Employer D does not offer an 
HDHP. Several full-time employees, who are eligible individuals, 
have HSAs. Employer D contributes to these employees' HSAs. Employer 
D must make comparable contributions to the HSAs of all full-time 
employees who are eligible individuals.
    Example 3. In a calendar year, Employer E offers an HDHP to its 
full-time employees. Most full-time employees are covered under 
Employer E's HDHP and Employer E makes

[[Page 50239]]

comparable contributions to these employees' HSAs and also to the 
HSAs of full-time employees who are eligible individuals and who are 
not covered under Employer E's HDHP. Employee H, a full-time 
employee of Employer E and a comparable participating employee, is 
covered under an HDHP provided by H's spouse's employer and not 
under Employer E's HDHP. Employer E must make comparable 
contributions to H's HSA.

    Q-7. If an employee and his or her spouse are eligible individuals 
who work for the same employer and one employee-spouse has family 
coverage for both employees under the employer's HDHP, must the 
employer make comparable contributions to the HSAs of both employees?
    A-7. (a) In general. If the employer makes contributions only to 
the HSAs of employees who are eligible individuals covered under its 
HDHP, the employer is not required to contribute to the HSAs of both 
employee-spouses. The employer is required to contribute to the HSA of 
the employee-spouse with coverage under the employer's HDHP, but is not 
required to contribute to the HSA of the employee-spouse covered under 
the employer's HDHP by virtue of his or her spouse's coverage. However, 
if the employer contributes to the HSA of any employee who is an 
eligible individual with coverage under any HDHP, the employer must 
make comparable contributions to the HSAs of both employee-spouses if 
they are both eligible individuals. If an employer is required to 
contribute to the HSAs of both employee-spouses, the employer is not 
required to contribute amounts in excess of the annual contribution 
limits in section 223(b).
    (b) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-7:

    Example 1. In a calendar year, Employer F offers an HDHP to its 
full-time employees. Most full-time employees are covered under 
Employer F's HDHP and Employer F makes comparable contributions only 
to these employees' HSAs. Employee H, a full-time employee of 
Employer F and an eligible individual has family coverage under 
Employer F's HDHP for H and H's spouse, Employee W, who is also a 
full-time employee of Employer F and an eligible individual. 
Employer F is required to make comparable contributions to H's HSA, 
but is not required to make comparable contributions to W's HSA.
    Example 2. In a calendar year, Employer G offers an HDHP to its 
full-time employees. Most full-time employees are covered under 
Employer G's HDHP and Employer G makes comparable contributions to 
these employees' HSAs and to the HSAs of full-time employees who are 
eligible individuals but are not covered under Employer G's HDHP. 
Employee W, a full-time employee of Employer G and an eligible 
individual, has family coverage under Employer G's HDHP for W and 
W's spouse, Employee H, who is also a full-time employee of Employer 
G and an eligible individual. Employer G must make comparable 
contributions to W's HSA and to H's HSA.

    Q-8. Does an employer that makes HSA contributions only for non-
management employees who are eligible individuals, but not for 
management employees who are eligible individuals or that makes HSA 
contributions only for management employees who are eligible 
individuals but not for non-management employees who are eligible 
individuals satisfy the requirement that the employer make comparable 
contributions?
    A-8. (a) Management v. non-management. No. If management employees 
and non-management employees are comparable participating employees, 
the comparability rules are not satisfied. However, if non-management 
employees are comparable participating employees and management 
employees are not comparable participating employees, the comparability 
rules may be satisfied. But see Q & A-1 in Sec.  54.4980G-5 on 
contributions made through a cafeteria plan.
    (b) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-8:

    Example 1. In a calendar year, Employer H maintains an HDHP 
covering all management and non-management employees. Employer H 
contributes $1,000 for the calendar year to the HSA of each non-
management employee who is an eligible individual covered under its 
HDHP. Employer H does not contribute to the HSAs of any of its 
management employees who are eligible individuals covered under its 
HDHP. The comparability rules are not satisfied.
    Example 2. In a calendar year, Employer J maintains an HDHP for 
non-management employees only. Employer J does not maintain an HDHP 
for its management employees. Employer J contributes $1,000 for the 
calendar year to the HSA of each non-management employee who is an 
eligible individual with coverage under its HDHP. Employer J does 
not contribute to the HSAs of any of its non-management employees 
not covered under its HDHP or to the HSAs of any of its management 
employees. The comparability rules are satisfied.
    Example 3. In a calendar year, Employer K maintains an HDHP for 
management employees only. Employer K does not maintain an HDHP for 
its non-management employees. Employer K contributes $1,000 for the 
calendar year to the HSA of each management employee who is an 
eligible individual with coverage under its HDHP. Employer K does 
not contribute to the HSAs of any of its management employees not 
covered under its HDHP or to the HSAs of any of its non-management 
employees. The comparability rules are satisfied.

    Q-9. If an employer contributes to the HSAs of former employees who 
are eligible individuals, do the comparability rules apply to these 
contributions?
    A-9. (a) Former employees. Yes. The comparability rules apply to 
contributions an employer makes to former employees' HSAs. Therefore, 
if an employer contributes to any former employee's HSA, it must make 
comparable contributions to the HSAs of all comparable participating 
former employees (former employees who are eligible individuals with 
the same category of HDHP coverage). However, an employer is not 
required to make comparable contributions to the HSAs of former 
employees with coverage under the employer's HDHP because of an 
election under a COBRA continuation provision (as defined in section 
9832(d)(1)). See Q & A-5 and Q & A-11 in this section. The 
comparability rules apply separately to former employees because they 
are a separate category of covered employee. See Q & A-5 in this 
section.
    (b) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-9:

    Example 1. In a calendar year, Employer L contributes $1,000 for 
the calendar year to the HSA of each current employee who is an 
eligible individual with coverage under any HDHP. Employer L does 
not contribute to the HSA of any former employee who is an eligible 
individual. Employer L's contributions satisfy the comparability 
rules.
    Example 2. In a calendar year, Employer M contributes to the 
HSAs of current employees and former employees who are eligible 
individuals covered under any HDHP. Employer M contributes $750 to 
the HSA of each current employee with self-only HDHP coverage and 
$1,000 to the HSA of each current employee with family HDHP 
coverage. Employer M also contributes $300 to the HSA of each former 
employee with self-only HDHP coverage and $400 to the HSA of each 
former employee with family HDHP coverage. Employer M's 
contributions satisfy the comparability rules.

    Q-10. Is an employer permitted to make comparable contributions 
only to the HSAs of comparable participating former employees who have 
coverage under the employer's HDHP?
    A-10. If during a calendar year, an employer contributes to the HSA 
of any former employee who is an eligible individual covered under an 
HDHP provided by the employer, the employer is required to make 
comparable contributions to the HSAs of all former employees who are 
comparable participating former employees with coverage under any HDHP 
provided by the employer. An employer that contributes only to the HSAs 
of former

[[Page 50240]]

employees who are eligible individuals with coverage under the 
employer's HDHP is not required to make comparable contributions to the 
HSAs of former employees who are eligible individuals and who are not 
covered under the employer's HDHP. However, an employer that 
contributes to the HSA of any former employee who is an eligible 
individual with coverage under any HDHP, even if that coverage is not 
the employer's HDHP, must make comparable contributions to the HSAs of 
all former employees who are eligible individuals whether or not 
covered under an HDHP of the employer.
    Q-11. If an employer contributes only to the HSAs of former 
employees who are eligible individuals with coverage under the 
employer's HDHP, must the employer make comparable contributions to the 
HSAs of former employees who are eligible individuals with coverage 
under the employer's HDHP because of an election under a COBRA 
continuation provision (as defined in section 9832(d)(1))?
    A-11. No. An employer that contributes only to the HSAs of former 
employees who are eligible individuals with coverage under the 
employer's HDHP is not required to make comparable contributions to the 
HSAs of former employees who are eligible individuals with coverage 
under the employer's HDHP because of an election under a COBRA 
continuation provision (as defined in section 9832(d)(1)).
    Q-12. How do the comparability rules apply if some employees have 
HSAs and other employees have Archer MSAs?
    A-12. (a) HSAs and Archer MSAs. The comparability rules apply 
separately to employees who have HSAs and employees who have Archer 
MSAs. However, if an employee has both an HSA and an Archer MSA, the 
employer may contribute to either the HSA or the Archer MSA, but not to 
both.
    (b) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-12:

    Example 1. In a calendar year, Employer N contributes $600 to 
the Archer MSA of each employee who is an eligible individual and 
who has an Archer MSA. Employer N contributes $500 for the calendar 
year to the HSA of each employee who is an eligible individual and 
who has an HSA. If an employee has both an Archer MSA and an HSA, 
Employer N contributes to the employee's Archer MSA and not to the 
employee's HSA. Employee X has an Archer MSA and an HSA. Employer N 
contributes $600 for the calendar year to X's Archer MSA but does 
not contribute to X's HSA. Employer N's contributions satisfy the 
comparability rules.
    Example 2. Same facts as Example 1, except that if an employee 
has both an Archer MSA and an HSA, Employer N contributes to the 
employee's HSA and not to the employee's Archer MSA. Employer N 
contributes $500 for the calendar year to X's HSA but does not 
contribute to X's Archer MSA. Employer N's contributions satisfy the 
comparability rules.


Sec.  54.4980G-4  Calculating comparable contributions.

    Q-1. What are comparable contributions?
    A-1. (a) Definition. Contributions are comparable if they are 
either the same amount or the same percentage of the deductible under 
the HDHP for employees who are eligible individuals with the same 
category of coverage. Employees with self-only HDHP coverage are tested 
separately from employees with family HDHP coverage. See Q & A-1 and Q 
& A-2 in Sec.  54.4980G-1. An employer is not required to contribute 
the same amount or the same percentage of the deductible for employees 
who are eligible individuals with self-only HDHP coverage that it 
contributes for employees who are eligible individuals with family HDHP 
coverage. An employer that satisfies the comparability rules by 
contributing the same amount to the HSAs of all employees who are 
eligible individuals with self-only HDHP coverage is not required to 
contribute any amount to the HSAs of employees who are eligible 
individuals with family HDHP coverage, or to contribute the same 
percentage of the family HDHP deductible as the amount contributed with 
respect to self-only HDHP coverage. Similarly, an employer that 
satisfies the comparability rules by contributing the same amount to 
the HSAs of all employees who are eligible individuals with family HDHP 
coverage is not required to contribute any amount to the HSAs of 
employees who are eligible individuals with self-only HDHP coverage, or 
to contribute the same percentage of the self-only HDHP deductible as 
the amount contributed with respect to family HDHP coverage.
    (b) Examples. Assume that the HDHPs in Example 1 through Example 7 
satisfy the definition of an HDHP for the 2007 calendar year. The 
following examples illustrate the rules in paragraph (a) of this Q & A-
1:

    Example 1. In the 2007 calendar year, Employer A offers its 
full-time employees three health plans, including an HDHP with self-
only coverage and a $2,000 deductible. Employer A contributes $1,000 
for the calendar year to the HSA of each employee who is an eligible 
individual electing the self-only HDHP coverage. Employer A makes no 
HSA contributions for employees with family HDHP coverage or for 
employees who do not elect the employer's self-only HDHP. Employer 
A's HSA contributions satisfy the comparability rules.
    Example 2. In the 2007 calendar year, Employer B offers its 
employees an HDHP with a $3,000 deductible for self-only coverage 
and a $4,000 deductible for family coverage. Employer B contributes 
$1,000 for the calendar year to the HSA of each employee who is an 
eligible individual electing the self-only HDHP coverage. Employer B 
contributes $2,000 for the calendar year to the HSA of each employee 
who is an eligible individual electing the family HDHP coverage. 
Employer B's HSA contributions satisfy the comparability rules.
    Example 3. In the 2007 calendar year, Employer C offers its 
employees an HDHP with a $1,500 deductible for self-only coverage 
and a $3,000 deductible for family coverage. Employer C contributes 
$1,000 for the calendar year to the HSA of each employee who is an 
eligible individual electing the self-only HDHP coverage. Employer C 
contributes $1,000 for the calendar year to the HSA of each employee 
who is an eligible individual electing the family HDHP coverage. 
Employer C's HSA contributions satisfy the comparability rules.
    Example 4. In the 2007 calendar year, Employer D offers its 
employees an HDHP with a $1,500 deductible for self-only coverage 
and a $3,000 deductible for family coverage. Employer D contributes 
$1,500 for the calendar year to the HSA of each employee who is an 
eligible individual electing the self-only HDHP coverage. Employer D 
contributes $1,000 for the calendar year to the HSA of each employee 
who is an eligible individual electing the family HDHP coverage. 
Employer D's HSA contributions satisfy the comparability rules.
    Example 5. (i) In the 2007 calendar year, Employer E maintains 
two HDHPs. Plan A has a $2,000 deductible for self-only coverage and 
a $4,000 deductible for family coverage. Plan B has a $2,500 
deductible for self-only coverage and a $4,500 deductible for family 
coverage. For the calendar year, Employer E makes contributions to 
the HSA of each full-time employee who is an eligible individual 
covered under Plan A of $600 for self-only coverage and $1,000 for 
family coverage. Employer E satisfies the comparability rules, if it 
makes either of the following contributions for the 2007 calendar 
year to the HSA of each full-time employee who is an eligible 
individual covered under Plan B--
    (A) $600 for each full-time employee with self-only coverage and 
$1,000 for each full-time employee with family coverage; or
    (B) $750 for each employee with self-only coverage and $1,125 
for each employee with family coverage (the same percentage of the 
deductible Employer E contributes for full-time employees covered 
under Plan A, 30% of the deductible for self-only coverage and 25% 
of the deductible for family coverage).
    (ii) Employer E also makes contributions to the HSA of each 
part-time employee who is an eligible individual covered under Plan 
A of $300 for self-only coverage and $500 for family coverage. 
Employer E satisfies the

[[Page 50241]]

comparability rules, if it makes either of the following 
contributions for the 2007 calendar year to the HSA of each part-
time employee who is an eligible individual covered under Plan B--
    (A) $300 for each part-time employee with self-only coverage and 
$500 for each part-time employee with family coverage; or
    (B) $375 for each part-time employee with self-only coverage and 
$563 for each part-time employee with family coverage (the same 
percentage of the deductible Employer E contributes for part-time 
employees covered under Plan A, 15% of the deductible for self-only 
coverage and 12.5% of the deductible for family coverage).
    Example 6. (i) In the 2007 calendar year, Employer F maintains 
an HDHP. The HDHP has a $2,500 deductible for self-only coverage, 
and the following family coverage options--
    (A) A $3,500 deductible for self plus one dependent;
    (B) A $3,500 deductible for self plus spouse;
    (C) A $3,500 deductible for self plus two or more dependents;
    (D) A $3,500 deductible for self plus spouse and one dependent; 
and
    (E) A $3,500 deductible for self plus spouse and two or more 
dependents.
    (ii) Employer F makes the following contributions for the 
calendar year to the HSA of each full-time employee who is an 
eligible individual covered under the HDHP--
    (A) $750 for self-only coverage;
    (B) $1,000 for self plus one dependent;
    (C) $1,000 for self plus spouse;
    (D) $1,000 for self plus two or more dependents;
    (E) $1,000 for self plus spouse and one dependent; and
    (F) $1,000 for self plus spouse and two or more dependents.
    (iii) Employer F's HSA contributions satisfy the comparability 
rules.
    Example 7. (i) In the 2007 calendar year, Employer G maintains 
an HDHP. The HDHP has a $1,800 deductible for self-only coverage and 
the following family coverage options--
    (A) A $3,500 deductible for self plus one dependent;
    (B) A $3,800 deductible for self plus spouse;
    (C) A $4,000 deductible for self plus two or more dependents;
    (D) A $4,500 deductible for self plus spouse and one dependent; 
and
    (E) A $5,000 deductible for self plus spouse and two or more 
dependents.
    (ii) Employer G makes the following contributions for the 
calendar year to the HSA of each full-time employee who is an 
eligible individual covered under the HDHP--
    (A) $360 for self-only coverage;
    (B) $875 for self plus one dependent;
    (C) $950 for self plus spouse;
    (D) $1,000 for self plus two or more dependents;
    (E) $1,125 for self plus spouse and one dependent; and
    (F) $1,250 for self plus spouse and two or more dependents.
    (iii) Employer G's HSA contributions satisfy the comparability 
rules because Employer G has made contributions that are the same 
percentage of the deductible for eligible employees with the same 
category of coverage (20% of the deductible for eligible employees 
with self-only coverage and 25% of the deductible for eligible 
employees with family coverage). Employer G could also satisfy the 
comparability rules by contributing the same dollar amount for each 
category of coverage.
    Example 8. In a calendar year, Employer H offers its employees 
an HDHP and a health flexible spending arrangement (health FSA). The 
health FSA reimburses employees for medical expenses as defined in 
section 213(d). Some of Employer H's employees have coverage under 
the HDHP and the health FSA. For the calendar year, Employer H 
contributes $500 to the HSA of each of employee who is an eligible 
individual, but does not contribute to the HSAs of employees who 
have coverage under the health FSA or under a spouse's health FSA. 
In addition, some of Employer H's employees have coverage under the 
HDHP and are enrolled in Medicare. Employer H does not contribute to 
the HSAs of employees who are enrolled in Medicare. The employees 
who have coverage under the health FSA or under a spouse's health 
FSA are not comparable participating employees because they are not 
eligible individuals under section 223(c)(1). Similarly, the 
employees who are enrolled in Medicare are not comparable 
participating employees because they are not eligible individuals 
under section 223(b)(7) and (c)(1). Therefore, employees who have 
coverage under the health FSA or under a spouse's health FSA and 
employees who are enrolled in Medicare are excluded from 
comparability testing. See sections 4980G(b) and 4980E. Employer H's 
contributions satisfy the comparability rules.

    Q-2. How do the comparability rules apply to employer contributions 
to employees' HSAs if some employees work full-time during the entire 
calendar year, and other employees work full-time for less than the 
entire calendar year?
    A-2. Employer contributions to the HSAs of employees who work full-
time for less than twelve months satisfy the comparability rules if the 
contribution amount is comparable when determined on a month-to-month 
basis. For example, if the employer contributes $240 to the HSA of each 
full-time employee who works the entire calendar year, the employer 
must contribute $60 to the HSA of a full-time employee who works three 
months of the calendar year. The rules set forth this Q & A-2 apply to 
employer contributions made on a pay-as-you-go basis or on a look-back-
basis as described in Q & A-3 in this section. See sections 4980G(b) 
and 4980E(d)(2)(B).
    Q-3. How does an employer comply with the comparability rules when 
some employees who are eligible individuals do not work for the 
employer during the entire calendar year?
    A-3. (a) In general. In determining whether the comparability rules 
are satisfied, an employer must take into account all full-time and 
part-time employees who were employees and eligible individuals for any 
month during the calendar year. (Full-time and part-time employees are 
tested separately. See Q & A-5 in Sec.  54.4980G-3.) There are two 
methods to comply with the comparability rules when some employees who 
are eligible individuals do not work for the employer during the entire 
calendar year; contributions may be made on a pay-as-you-go basis or on 
a look-back basis. See Q & A-9 through Q & A-11 in Sec.  54.4980G-3 for 
the rules regarding comparable contributions to the HSAs of former 
employees.
    (b) Contributions on a pay-as-you-go basis. An employer may comply 
with the comparability rules by contributing amounts at one or more 
times for the calendar year to the HSAs of employees who are eligible 
individuals, if contributions are the same amount or the same 
percentage of the HDHP deductible for employees who are eligible 
individuals as of the first day of the month with the same category of 
coverage and are made at the same time. Contributions made at the 
employer's usual payroll interval for different groups of employees are 
considered to be made at the same time. For example, if salaried 
employees are paid monthly and hourly employees are paid bi-weekly, an 
employer may contribute to the HSAs of hourly employees on a bi-weekly 
basis and to the HSAs of salaried employees on a monthly basis. An 
employer may change the amount that it contributes to the HSAs of 
employees at any point. However, the changed contribution amounts must 
satisfy the comparability rules.
    (c) Examples. The following examples illustrate the rules in 
paragraph (b) of this Q & A-3:

    Example 1. (i) Beginning on January 1st, Employer J contributes 
$50 per month on the first day of each month to the HSA of each 
employee who is an eligible individual. Employer J does not 
contribute to the HSAs of former employees. In mid-March of the same 
year, Employee X, an eligible individual, terminates employment 
after Employer J has contributed $150 to X's HSA. After X terminates 
employment, Employer J does not contribute additional amounts to X's 
HSA. In mid-April of the same year, Employer J hires Employee Y, an 
eligible individual, and contributes $50 to Y's HSA in May and $50 
in June. Effective in July of the same year, Employer J stops 
contributing to the HSAs of all employees and makes no contributions 
to the HSA of any employee for the months of July through December. 
In August, Employer J hires Employee Z, an eligible individual. 
Employer J does not

[[Page 50242]]

contribute to Z's HSA. After Z is hired, Employer J does not hire 
additional employees. As of the end of the calendar year, Employer J 
has made the following HSA contributions to its employees' HSAs--
    (A) Employer J contributed $150 to X's HSA;
    (B) Employer J contributed $100 to Y's HSA;
    (C) Employer J did not contribute to Z's HSA; and
    (D) Employer J contributed $300 to the HSA of each employee who 
was an eligible individual and employed by Employer from January 
through June.
    (ii) Employer J's contributions satisfy the comparability rules.
    Example 2. In a calendar year, Employer K offers its employees 
an HDHP and contributes on a monthly pay-as-you go-basis to the HSAs 
of employees who are eligible individuals with coverage under 
Employer K's HDHP. In the calendar year, Employer K contributes $50 
per month to the HSA of each of employee with self-only HDHP 
coverage and $100 per month to the HSA of each employee with family 
HDHP coverage. From January 1st through March 30th of the calendar 
year, Employee X is an eligible individual with self-only HDHP 
coverage. From April 1st through December 30th of the calendar year, 
X is an eligible individual with family HDHP coverage. For the 
months of January, February and March of the calendar year, Employer 
K contributes $50 per month to X's HSA. For the remaining months of 
the calendar year, Employer K contributes $100 per month to X's HSA. 
Employer K's contributions to X's HSA satisfy the comparability 
rules.

    (d) Contributions on a look-back basis. An employer may also 
satisfy the comparability rules by determining comparable contributions 
for the calendar year at the end of the calendar year, taking into 
account all employees who were eligible individuals for any month 
during the calendar year and contributing the correct amount (a 
percentage of the HDHP deductible or a specified dollar amount for the 
same categories of coverage) to the employees' HSAs.
    (e) Example. The following example illustrates the rules in 
paragraph (d) of this Q & A-3:

    Example. In a calendar year, Employer L offers its employees an 
HDHP and contributes on a look-back-basis to the HSAs of employees 
who are eligible individuals with coverage under Employer L's HDHP. 
Employer L contributes $600 (i.e. $50 per month) for the calendar 
year to the HSA of each of employee with self-only HDHP coverage and 
$1,200 (i.e., $100 per month) for the calendar year to the HSA of 
each employee with family HDHP coverage. From January 1st through 
June 30th of the calendar year, Employee Y is an eligible individual 
with family HDHP coverage. From July 1st through December 31, Y is 
an eligible individual with self-only HDHP coverage. Employer L 
contributes $900 on a look-back-basis for the calendar year to Y's 
HSA ($100 per month for the months of January through June and $50 
per month for the months of July through December). Employer L's 
contributions to Y's HSA satisfy the comparability rules.

    Q-4. May an employer make all of its contributions to the HSAs of 
its employees who are eligible individuals at the beginning of the 
calendar year (i.e., on a pre-funded basis) instead of contributing on 
a pay-as-you-go or on a look-back basis?
    A-4. (a) Contributions on a pre-funded basis. Yes. An employer may 
make all of its contributions to the HSAs of its employees who are 
eligible individuals at the beginning of the calendar year. An employer 
that pre-funds 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 have worked the entire calendar year. 
See Q & A-12 in this section. Under section 223(d)(1)(E), an account 
beneficiary's interest in an HSA is nonforfeitable. An employer must 
make comparable contributions for all employees who are comparable 
participating employees for any month during the calendar year, 
including employees who are eligible individuals hired after the date 
of initial funding. An employer that makes HSA contributions on a pre-
funded basis may also contribute on a pre-funded-basis to the HSAs of 
employees who are eligible individuals hired after the date of initial 
funding. Alternatively, an employer that has pre-funded the HSAs of 
comparable participating employees may contribute to the HSAs of 
employees who are eligible individuals hired after the date of initial 
funding on a pay-as-you-go basis or on a look-back basis. An employer 
that makes HSA contributions on a pre-funded basis must use the same 
contribution method for all employees who are eligible individuals 
hired after the date of initial funding.
    (b) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-4:

    Example. (i) On January 1, Employer M contributes $1,200 for the 
calendar year on a pre-funded basis to the HSA of each of employee 
who is an eligible individual. In mid-May, Employer M hires Employee 
B, an eligible individual. Therefore, Employer M is required to make 
comparable contributions to B's HSA beginning in June. Employer M 
satisfies the comparability rules with respect to contributions to 
B's HSA if it makes HSA contributions in any one of the following 
ways--
    (A) Pre-funding B's HSA by contributing $700 to B's HSA;
    (B) Contributing $100 per month on a pay-as-you-go basis to B's 
HSA; or
    (C) Contributing to B's HSA at the end of the calendar year 
taking into account each month that B was an eligible individual and 
employed by Employer M.
    (ii) If Employer M hires additional employees who are eligible 
individuals after initial funding, it must use the same contribution 
method for these employees that it used to contribute to B's HSA.

    Q-5. Must an employer use the same contribution method as described 
in Q & A-3 and Q & A-4 of this section for all employees who were 
comparable participating employees for any month during the calendar 
year?
    A-5. Yes. If an employer makes comparable HSA contributions on a 
pay-as-you-go basis, it must do so for each employee who is a 
comparable participating employee during the pay period. If an employer 
makes comparable contributions on a look-back basis, it must do so for 
each employee who was a comparable participating employee for any month 
during the calendar year. If an employer makes HSA contributions on a 
pre-funded basis, it must do so for all employees who are comparable 
participating employees at the beginning of the calendar year. An 
employer that contributes on a pre-funded basis must make comparable 
HSA contributions for all employees who are comparable participating 
employees for any month during the calendar year, including employees 
who are eligible individuals hired after the date of initial funding. 
See Q & A-4 in this section for rules regarding contributions for 
employees hired after initial funding.
    Q-6. How does an employer comply with the comparability rules if an 
employee has not established an HSA at the time the employer 
contributes to its employees' HSAs?
    A-6. (a) Employee has not established an HSA. If an employee has 
not established an HSA at the time the employer funds its employees' 
HSAs, the employer complies with the comparability rules by 
contributing comparable amounts to the employee's HSA when the employee 
establishes the HSA, taking into account each month that the employee 
was a comparable participating employee. However, an employer is not 
required to make comparable contributions for a calendar year to an 
employee's HSA if the employee has not established an HSA by December 
31st of the calendar year.
    (b) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-6:


[[Page 50243]]


    Example. Beginning on January 1st, Employer N contributes $500 
per calendar year on a pay-as-you-go basis to the HSA of each 
employee who is an eligible individual. Employee C is an eligible 
individual during the entire calendar year but does not establish an 
HSA until March. Notwithstanding C's delay in establishing an HSA, 
Employer N must make up the missed HSA contributions for January and 
February by April 15th of the following calendar year.

    Q-7. If an employer bases its contributions on a percentage of the 
HDHP deductible, how is the correct percentage or dollar amount 
computed?
    A-7. (a) Computing HSA contributions. The correct percentage is 
determined by rounding to nearest 1/100th of a percentage point and the 
dollar amount is determined by rounding to the nearest whole dollar.
    (b) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-7:

    Example. In this Example, assume that the HDHP provided by 
Employer P satisfies the definition of an HDHP for the 2007 calendar 
year. In the 2007 calendar year, Employer P maintains two HDHPs. 
Plan A has a deductible of $3,000 for self-only coverage. Employer P 
contributes $1,000 for the calendar year to the HSA of each employee 
covered under Plan A. Plan B has a deductible of $3,500 for self-
only coverage. Employer P satisfies the comparability rules if it 
makes either of the following contributions for the 2007 calendar 
year to the HSA of each employee who is an eligible individual with 
self-only coverage under Plan B--
    (i) $1,000; or
    (ii) $1,167 (33.33% of the deductible rounded to the nearest 
whole dollar amount).

    Q-8. Does an employer that contributes to the HSA of each 
comparable participating employee in an amount equal to the employee's 
HSA contribution or a percentage of the employee's HSA contribution 
(matching contributions) satisfy the rule that all comparable 
participating employees receive comparable contributions?
    A-8. No. If all comparable participating employees do not 
contribute the same amount to their HSAs and, consequently, do not 
receive comparable contributions to their HSAs, the comparability rules 
are not satisfied, notwithstanding that the employer offers to make 
available the same contribution amount to each comparable participating 
employee. But see Q & A-1 in Sec.  54.4980G-5 on contributions to HSAs 
made through a cafeteria plan.
    Q-9. If an employer conditions contributions by the employer to an 
employee's HSA on an employee's participation in health assessments, 
disease management programs or wellness programs and makes the same 
contributions available to all employees who participate in the 
programs, do the contributions satisfy the comparability rules?
    A-9. No. If all comparable participating employees do not elect to 
participate in all the programs and consequently, all comparable 
participating employees do not receive comparable contributions to 
their HSAs, the employer contributions fail to satisfy the 
comparability rules. But see Q & A-1 in Sec.  54.4980G-5 on 
contributions made to HSAs through a cafeteria plan.
    Q-10. If an employer makes additional contributions to the HSAs of 
all comparable participating employees who have attained a specified 
age or who have worked for the employer for a specified number of 
years, do the contributions satisfy the comparability rules?
    A-10. No. If all comparable participating employees do not meet the 
age or length of service requirement, all comparable participating 
employees do not receive comparable contributions to their HSAs and the 
employer contributions fail to satisfy the comparability rules.
    Q-11. If an employer makes additional contributions to the HSAs of 
all comparable participating employees who qualify for the additional 
contributions (HSA catch-up contributions) under section 223(b)(3), do 
the contributions satisfy the comparability rules?
    A-11. No. If all comparable participating employees do not qualify 
for the additional HSA contributions under section 223(b)(3), all 
comparable participating employees do not receive comparable 
contributions to their HSAs, and the employer contributions fail to 
satisfy the comparability rules.
    Q-12. If an employer's contributions to an employee's HSA result in 
non-comparable contributions, may the employer recoup the excess amount 
from the employee's HSA?
    A-12. No. An employer may not recoup from an employee's HSA any 
portion of the employer's contribution to the employee's HSA. Under 
section 223(d)(1)(E), an account beneficiary's interest in an HSA is 
nonforfeitable. However, an employer may make additional HSA 
contributions to satisfy the comparability rules. An employer may 
contribute up until April 15th following the calendar year in which the 
non-comparable contributions were made. An employer that makes 
additional HSA contributions to correct non-comparable contributions 
must also contribute reasonable interest. However, an employer is not 
required to contribute amounts in excess of the annual contribution 
limits in section 223(b).


Sec.  54.4980G-5  HSA comparability rules and cafeteria plans and 
waiver of excise tax.

    Q-1. If an employer makes contributions through a section 125 
cafeteria plan to the HSA of each employee who is an eligible 
individual are the contributions subject to the comparability rules?
    A-1. No. The comparability rules do not apply to HSA contributions 
that an employer makes through a section 125 cafeteria plan. However, 
contributions to an HSA made under a cafeteria plan are subject to the 
section 125 nondiscrimination rules (eligibility rules, contributions 
and benefits tests and key employee concentration tests). See section 
125(b), (c) and (g) and Prop. Treas. Reg. Sec.  1.125-1, Q & A-19, (49 
FR 19321).
    Q-2. If an employer makes contributions through a cafeteria plan to 
the HSA of each employee who is an eligible individual in an amount 
equal to the amount of the employee's HSA contribution or a percentage 
of the amount of the employee's HSA contribution (i.e., matching 
contributions), are the contributions subject to the section 4980G 
comparability rules?
    A-2. No. The comparability rules do not apply to HSA contributions 
that an employer makes through a section 125 cafeteria plan. Thus, 
where matching contributions are made by an employer through a 
cafeteria plan, the contributions are not subject to the comparability 
rules of section 4980G. However, contributions, including matching 
contributions, to an HSA made under a cafeteria plan are subject to the 
section 125 nondiscrimination rules (eligibility rules, contributions 
and benefits tests and key employee concentration tests). See Q & A-1 
in this section.
    Q-3. If an employer provides HDHP coverage through a cafeteria 
plan, but the employer's HSA contributions are not provided through the 
cafeteria plan, do the cafeteria plan nondiscrimination rules or the 
comparability rules apply to the HSA contributions?
    A-3. (a) HDHP provided through cafeteria plan. The comparability 
rules in section 4980G apply to the HSA contributions. The cafeteria 
plan nondiscrimination rules apply only to HSA contributions made 
through a cafeteria plan irrespective of whether the HDHP is provided 
through a cafeteria plan.
    (b) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-3:


[[Page 50244]]


    Example. Employer A provides HDHP coverage through its cafeteria 
plan. Employer A automatically contributes to the HSA of each 
employee who is an eligible individual with HDHP coverage through 
the cafeteria plan. Employees make no election with respect to 
Employer A's HSA contributions and have no right to receive cash or 
other taxable benefits in lieu of the HSA contributions. Employer A 
contributes only to the HSAs of employees who have elected HDHP 
coverage through the cafeteria plan. The comparability rules apply 
to Employer A's HSA contributions because the HSA contributions are 
not made through the cafeteria plan.

    Q-4. If under the employer's cafeteria plan, employees who are 
eligible individuals and who participate in health assessments, disease 
management programs or wellness programs receive an employer 
contribution to an HSA, unless the employees elect cash, are the 
contributions subject to the comparability rules?
    A-4. No. The comparability rules do not apply to employer 
contributions to an HSA made through a cafeteria plan. See Q & A-1 in 
this section.
    Q-5. May all or part of the excise tax imposed under section 4980G 
be waived?
    A-5. In the case of a failure which is due to reasonable cause and 
not to willful neglect, all or a portion of the excise tax imposed 
under section 4980G may be waived to the extent that the payment of the 
tax would be excessive relative to the failure involved. See sections 
4980G(b) and 4980E(c).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-16941 Filed 8-25-05; 8:45 am]
BILLING CODE 4830-01-P