HSA Comparability Rules for Employer Contributions
An employer that puts money into employees’ HSAs has to treat similarly situated employees alike, or pay an excise tax. Running contributions through a cafeteria plan changes which rules apply.
What Comparability Requires
Section 4980G and 26 CFR 54.4980G-4 set the standard.
The Tax
If an employer fails to make comparable contributions to employees’ HSAs for a calendar year, an excise tax equal to 35% of the aggregate amount the employer contributed to employees’ HSAs for that year applies (Treasury final regulations). Because the tax applies to the total the employer contributed, the cost of a mistake can be large compared with the contributions themselves. Reviewing the design with a tax adviser before the year starts is a sensible safeguard. You can test your own figures with our percent vs flat dollar contribution calculator.
What Comparable Means
Each month, contributions are comparable if they are the same dollar amount or the same percentage of the HDHP deductible for eligible individuals with the same category of coverage. Keep in mind that the test looks at contributions for people in the same coverage category, so a clear written contribution schedule makes it easier to show that employees were treated the same way.
Coverage Categories
Employees with self-only coverage are tested separately from those with family coverage. Family tiers may be tested separately, but a higher tier cannot receive less than a lower one. Employers should check with a tax adviser on how their own tier structure is treated. A contribution design that looks fair on paper can still fail the test if a higher coverage tier receives less than a lower one.
Part-Time Employees
Full-time and part-time employees are tested separately, so each group can receive different amounts. Employers sometimes want to give part-time staff a smaller amount, and the rules allow this because the groups are tested separately. Define the full-time and part-time cutoff in writing and apply it the same way to everyone.
Who Is Tested
Only eligible individuals are tested. Employees who have a health FSA or are enrolled in Medicare are not eligible individuals and are excluded from testing. Benefits teams should keep a current list of who qualifies each month, since eligibility can change with a coverage election or Medicare enrollment. A tax adviser can help with questions about how a particular employee is treated.
Month By Month
Contributions are measured monthly. Employers can contribute pay-as-you-go, on a look-back basis at year end, or pre-fund the full year. Pre-funding gives employees early access to the money, while a look-back approach lets the employer true up at year end. Whichever method is used, document it in advance and check the monthly results.
Why Many Employers Contribute Through Section 125
The regulations treat contributions made through a cafeteria plan differently.
Comparability Does Not Apply
The comparability rules do not apply to HSA contributions an employer makes through a Section 125 cafeteria plan (26 CFR 54.4980G-5). This is one reason many employers run HSA contributions through the cafeteria plan. The rules are technical, so confirm with a tax adviser that the plan is set up correctly before relying on this treatment.
Matching Contributions
Matching contributions made through the cafeteria plan are also outside the comparability rules. Employers that match employee deferrals often do so through payroll and the cafeteria plan. The match should follow the plan document, and a tax adviser can confirm whether a specific design qualifies.
Cafeteria Plan Tests Instead
Contributions through a cafeteria plan are subject to the Section 125 nondiscrimination rules, including the eligibility, contributions and benefits, and key employee concentration tests. The cafeteria plan tests are separate from the comparability rules, so passing one does not mean passing the other. Employers should confirm with their plan adviser or counsel that the plan has been tested each year.
Wellness-Based Contributions
Employer HSA contributions earned through health assessments, disease management or wellness programs inside a cafeteria plan are also outside comparability. Wellness programs tied to HSA dollars should be written into the plan document and applied the same way to everyone who can take part. Counsel can confirm how wellness incentive rules affect the design.
Have A Cafeteria Plan Document
The treatment depends on the contributions actually being made under a cafeteria plan, so the plan document matters. If the plan document is missing, out of date or does not mention HSA contributions, the tax treatment may be at risk. Review the document with counsel each year and update it when contribution terms change.
Compare The Tradeoff
The decision is which set of tests to live with. See our Section 125 guide.
Mistakes and Fixes
The regulation allows correction in some cases.
Late Correction
Missed contributions can be corrected with additional contributions plus reasonable interest by April 15 of the following year. The federal short-term rate is deemed reasonable interest. Because the correction window is short, employers should review contributions during the year rather than waiting until the deadline. A tax adviser can confirm the interest rate and the steps needed to complete a correction.
Rounding
Percentages are rounded to the nearest 1/100th of a percent and dollar amounts to the nearest whole dollar. Rounding matters most when contributions are set as a percentage of the deductible. Payroll and the benefits platform should use the same rounding rule, so monthly amounts match what was intended and the records line up.
Partial-Year Employees
Contributions are tested for the months the employee is an eligible individual. Employees who join or leave coverage mid-year are tested only for the months they qualify. Keep start and end dates for each person, so the monthly results can be supported if anyone asks later.
Do Not Forget New Hires
Set the contribution at hire and test it monthly. Build a step into onboarding so the right HSA contribution starts with the first eligible month, not months later. Then include new hires in the same monthly review as the rest of the workforce.
Watch Medicare-Eligible Staff
Employees enrolled in Medicare are excluded from the test and cannot receive HSA contributions. See our Medicare and HSA guide.
Keep Records
Retain contribution records by employee and month. Keep records of what was contributed, to whom and when, along with the plan document and any tests that were run. Good records make it easier to answer a question from a tax adviser or an auditor.
Questions We Get About HSA Comparability
What happens if we violate comparability?
An excise tax of 35% of the aggregate amount the employer contributed to employees’ HSAs for the calendar year.
Can we give more to employees with family coverage?
Family and self-only coverage are tested separately, so different amounts can be comparable if the same rules apply within each category.
Can part-time employees get less?
Yes. Full-time and part-time employees are tested separately.
Do cafeteria plan contributions have to be comparable?
No. Comparability rules do not apply to contributions made through a Section 125 cafeteria plan, but Section 125 nondiscrimination tests do.
Can we fix a mistake?
Missed contributions can be corrected with additional contributions plus reasonable interest by April 15 of the following year.
Do Medicare enrollees count?
No. They are not eligible individuals and are excluded.
Do we test employees who are not eligible individuals?
No. Only eligible individuals are tested, and employees with a health FSA or Medicare enrollment are excluded.
What is the interest rate for correction?
The regulation deems the federal short-term rate reasonable.
Related Guides
Related reading: HSA, FSA and Section 125 Limits · FSA, HRA and HSA Coordination · Section 125 Cafeteria Plans · HSA Employee Education · Medicare and HSA Contributions · HSA Last-Month Rule, Testing Period, and Excess Contributions · HSA Eligibility and Employer Contributions
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Laws and rules referenced
26 U.S.C. § 4980G — Employer HSA contributions must be comparable for employees with the same coverage tier.
26 U.S.C. § 223 — Health savings accounts: eligibility, contribution limits and the age 55 catch-up.
26 U.S.C. § 125 — Cafeteria plans: pre-tax premium payments, plan limits and nondiscrimination rules.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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