My client’s medical plan and HSA run on a 9/1 plan year. The group contributes $2,000 to the HSA for employee only and $4,000 for family. They had 5 employees in 2021 and all 5 employees received the full employer contribution to the HSA on 9/1/21. The client made 10 new hires in 2022 and all 10 new hires received the full HSA employer contribution on their hire date (the group did not pro-rate). The client is concerned about the 5 employees that received the full election in 2021, but no employer funds in 2022. Are they allowed to give those 5 employees additional funds, or would that be considered discriminatory?
When an employer makes HSA contributions outside of a cafeteria plan, the Comparability Rules apply. These rules require employer contributions to be the same dollar amount or the same percentage of the HDHP deductible for each participating employee. Violating this rule means that all employer HSA contributions for the calendar year are subject to a 35% excise tax.
The Comparability Rules do not apply if employer contributions are made through a cafeteria plan, which is the case in most situations. Instead, the Section 125 nondiscrimination rules apply, which are more flexible than the strict Comparability Rules. HSA contributions must be included when running the Key Employee Concentration Test and the Contributions and Benefits Test. The plan would fail the Key Employee Test if key employees receive more than 25% of the aggregate nontaxable benefits. The plan would fail the Contributions and Benefits Test if benefits disproportionately favor highly compensated participants.
If any of the five employees are key employees or highly compensated participants, you client should run preliminary testing to make sure the additional contributions would not cause a testing failure.