Using A Cafeteria Plan Instead Of HSA Comparability
Routing employer HSA money through a section 125 plan swaps one test for another. This guide explains what the exception covers, what the plan must say and what testing replaces comparability.
The Cafeteria Plan Exception.
General information, not legal or tax advice. Statutes and rules change, so read the current text before you act.
The Full Comparability Framework
The overview page compares the two paths: comparability outside a plan, nondiscrimination testing inside one.
What Comparability Asks Of You
Seeing the outside-the-plan rule clearly makes the trade-offs of the cafeteria plan route easier to weigh.
The Cost Of A Miss Outside A Plan
The excise tax on failed comparability is the risk that a properly built cafeteria plan removes.
What The Exception Says.
Treasury’s regulation states that the comparability rules do not apply to HSA contributions an employer makes through a section 125 cafeteria plan. In their place, the contributions must meet the section 125 nondiscrimination requirements for eligibility, for contributions and benefits, and for key-employee concentration. The regulation looks to the written plan: the exception applies where the plan lets employees choose cash or another taxable benefit in place of all or part of an HSA contribution, which makes the amount available as a pre-tax salary reduction. That holds even if no employee actually elects a reduction.
The exception reaches more than salary reductions. Employer matching contributions through the plan are excluded from comparability, and so are employer contributions tied to health assessments, disease management or wellness participation when the plan offers pre-tax HSA salary reduction. The regulation’s examples also cover automatic employer deposits made with no election at all.
Choosing Between Two Paths.
Comparability is simple to explain and strict to apply: same amount, same category, no incentives. The cafeteria plan route allows incentive design, such as a deposit that rewards a wellness activity, but it costs something in return. The employer needs a written plan document and must test it each year.
The tests are directed at highly compensated and key employees. Section 125(b) removes the tax exclusion for highly compensated participants if the plan favors them on eligibility or contributions and benefits, and it limits benefits for key employees to a share of the total. Section 125(g) lists safe harbors, such as eligibility rules that require no more than three years of service.
Moving Contributions Inside The Plan.
Confirm that your cafeteria plan document covers HSA contributions and gives employees the cash-or-benefit choice the regulation describes. Move every employer deposit that depends on a match, a wellness activity or a tenure rule into the plan. Then add HSA deposits to the annual nondiscrimination test, alongside your other benefits.
Mistakes To Avoid.
A deposit made outside the plan does not become exempt because other deposits run through it. Keep the two streams separate and apply comparability to anything left outside. Do not assume testing can wait: a failed test affects the tax treatment of highly compensated participants for the plan year.
Related Topics For Plan Sponsors.
Cafeteria Plan Nondiscrimination Testing
The tests that replace comparability when HSA money moves through a plan.
Section 125 Cafeteria Plans And HSAs
How a cafeteria plan carries HSA money and what it asks of the employer.
HRA Vs HSA Vs FSA
Choosing among the tax-advantaged accounts an employer can offer.
Laws And Sources Referenced
The statements above rely on the following primary sources.
Internal Revenue Code section 125 — Cafeteria plans and their nondiscrimination requirements.
Internal Revenue Code section 4980G — Tax on employers that fail comparability for HSA contributions.
Treas. Reg. 54.4980G-5 — The cafeteria plan exception and the reasonable-cause waiver.
Treas. Reg. 54.4980G-3 — Employee categories, part-time definition, former employees and collectively bargained employees.
IRS Publication 969 — IRS guidance on HSAs, including employer comparability and the 35 percent tax.
Quick Answers.
Short replies to common questions about the cafeteria plan alternative.
Does a cafeteria plan remove the comparability rules completely?
For HSA contributions made through the plan, yes. The regulation says the comparability rules do not apply to them, and the section 125 nondiscrimination rules apply instead. Employer contributions made outside the plan stay subject to comparability.
Can we use a cafeteria plan to match what employees save?
Yes. Under the regulation, employer matching contributions made through a cafeteria plan are not tested for comparability, though they remain subject to the section 125 nondiscrimination rules. Outside a cafeteria plan, a match is a design that fails the test.
What happens if the cafeteria plan fails its nondiscrimination tests?
Section 125 withdraws the tax-free treatment of benefits from highly compensated participants in a plan that discriminates in their favor on eligibility or on contributions and benefits. Testing should be run and documented every plan year.
More Guides In This Series.
What Comparability Means For Employer HSA Contributions
The core rule, what it measures and what sits outside it.
HSA Comparability Categories: Self-Only And Family Coverage
How self-only and family tiers are tested apart.
HSA Comparability For Full-Time, Part-Time And Former Employees
Employee categories, the 30-hour line and former employees.
The 35 Percent Excise Tax On Non-Comparable HSA Contributions
How the tax is computed and how to correct a miss.
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