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What's the employer's role with HSA compliance?

Updated: May 9, 2023

Employer HSA contributions are excludable from an employee's gross income, and are not subject to income tax withholding, FICA, FUTA, or RRTA taxes. However, employers have limited responsibility for determining whether an employee's HSA contribution is excludable from income at the time the contribution is made. IRS Notice 2004-50 says that employers must determine only the following with respect to an employee's eligibility and maximum annual limit on HSA contributions:

  1. whether the employee is covered under a high deductible health plan (HDHP) sponsored by that employer;

  2. whether the employee has disqualifying coverage (including health FSAs, a spouse's health FSA, Medicare, TRICARE, Medicaid, medical plan with copays, HRAs and any other first-dollar coverage) sponsored by that employer; and

  3. the employee's age (for catch-up contributions).

Although not specifically stated in the guidance, it is implied that employers must determine whether contributions exceed the HSA annual contribution limit. For example, if an employee requested contributions that went well over the HSA annual limit, those contributions would obviously be unreasonable and should not be allowed. Further, if an employer has knowledge that an employee is enrolled in disqualifying coverage elsewhere, contributions should be stopped. For example, if an employee enrolls in Medicare but remains on the group health plan and the employer has knowledge of this, that employee is no longer HSA-eligible and contributions should cease. In addition, an employer may not recoup any portion of the employer's contribution to the employee's HSA. For example, on January 2, 2019, an employer makes a contribution to employees’ HSAs, in the expectation that the employees would work for the entire year. On February 1, 2019, one employee terminates employment. The employer couldn’t recoup any portion of the contribution previously made to the employee's HSA. Lastly, neither employers nor HSA trustees/custodians are responsible for reporting whether an HSA-eligible individual remains an eligible individual during the testing period associated with the full-contribution rule (or last-month rule). Employers should be aware of these limited responsibilities when offering HSA contributions for employees, and implement processes to ensure these responsibilities are met.

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