[Federal Register Volume 71, Number 146 (Monday, July 31, 2006)]
[Rules and Regulations]
[Pages 43056-43067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11991]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[TD 9277]
RIN 1545-BE30


Employer Comparable Contributions to Health Savings Accounts 
Under Section 4980G

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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[[Page 43057]]

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

DATES: Effective Date: These regulations are effective on July 31, 
2006.
    Applicability Date: These regulations apply to employer 
contributions to HSAs made on or after January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Mireille T. Khoury (202) 622-6080 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final 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 IRB 269), Q & A-32. See 
Sec.  601.601(d)(2).
    On August 26, 2005, proposed regulations (REG-138647-04) were 
published in the Federal Register (70 FR 50233). The proposed 
regulations clarified and expanded upon the guidance regarding the 
comparability rules published in Notice 2004-2 and in Notice 2004-50 
(2004-33 IRB 196), Q & A-46 through Q & A-54. See Sec.  601.601(d)(2) 
of this chapter. Written public comments on the proposed regulations 
were received and a public hearing was requested. The hearing was held 
on February 23, 2006. After consideration of all the comments, these 
final regulations adopt the provisions of the proposed regulations with 
certain modifications, the most significant of which are highlighted in 
this preamble.

Explanation of Provisions and Summary of Comments

    Several commentators requested that the effective date should be at 
least one year from the date the regulations are finalized to give 
employers sufficient time to implement changes required to comply with 
the final regulations. The final regulations will apply to employer 
contributions to HSAs made on or after January 1, 2007.
    An employer is not required to contribute to the HSAs of its 
employees. In general, however, 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 are in the same category of employees and who have the 
same category of high deductible health plan (HDHP) coverage. Under the 
proposed regulations, the categories of coverage were self-only HDHP 
coverage and family HDHP coverage. Several commentators recommended 
that the final regulations should recognize additional categories of 
coverage other than self-only and family HDHP. The final regulations 
adopt this recommendation and allow family HDHP coverage to be 
subdivided into the following additional categories of HDHP coverage: 
self plus one, self plus two and self plus three or more. In addition, 
the final regulations provide that an employer's contribution with 
respect to the self plus two category may not be less than the 
employer's contribution with respect to the self plus one category and 
the employer's contribution with respect to the self plus three or more 
category may not be less than the employer's contribution with respect 
to the self plus two category.
    In addition, several commentators requested separate treatment for 
groups of collectively bargained employees, such that employers' HSA 
contributions to collectively bargained employees would not be subject 
to the comparability rules. In response to these comments, the final 
regulations provide that employees who are included in a unit of 
employees covered by a bona fide collective bargaining agreement 
between employee representatives and one or more employers are not 
comparable participating employees, if health benefits were the subject 
of good faith bargaining between such employee representatives and such 
employer or employers. Collectively bargained employees are, therefore, 
disregarded for purposes of section 4980G.
    Numerous commentators requested guidance on the exception to the 
comparability rules for employer contributions made through a section 
125 cafeteria plan. In response to these comments, the final 
regulations provide additional guidance on how employer HSA 
contributions are made through a cafeteria plan. Specifically, the 
final regulations provide that employer contributions to employees' 
HSAs are made through the cafeteria plan if under the written cafeteria 
plan, the employees have the right to elect to receive cash or other 
taxable benefits in lieu of all or a portion of an HSA contribution 
(i.e., all or a portion of the HSA contributions are available as pre-
tax salary reduction amounts), regardless of whether an employee 
actually elects to contribute any amount to the HSA by salary 
reduction. The final regulations also provide several examples that 
illustrate the application of the cafeteria plan exception to the 
comparability rules.
    One commentator requested guidance on what actions an employer must 
take to locate any missing comparable participating former employees 
for purposes of contributions to eligible former employees. The final 
regulations provide guidance on this issue and explain that an employer 
making comparable contributions to former employees must take 
reasonable actions to locate any missing comparable participating 
former employees. In general, such reasonable actions include the use 
of certified mail, the Internal Revenue Service Letter Forwarding 
Program, see Rev. Proc. 94-22 (1994-1 CB 608), or the Social Security 
Administration's Letter Forwarding Service. See Sec.  601.601(d)(2).
    Several commentators requested that testing for comparability 
purposes be permitted on a plan year, rather than calendar year, basis. 
Section 4980G mandates the use of a calendar year for testing purposes. 
Accordingly, the final regulations do not adopt the suggestion for plan 
year testing. Also, the final

[[Page 43058]]

regulations have removed and reserved the provision dealing with 
instances where an employee has not established an HSA by the end of 
the calendar year.
    Finally, one commentator requested clarification on what would 
constitute reasonable interest for purposes of section 4980G. In 
response to this comment, the final regulations provide that the 
determination of whether a rate of interest used by an employer is 
reasonable will be based on all of the facts and circumstances. 
However, if an employer calculates interest using the Federal short-
term rate as determined by the Secretary in accordance with Code 
section 1274(d), the employer is deemed to use a reasonable interest 
rate.

Special Analyses

    It has been determined that these regulations are 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. These regulations do 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, the proposed regulations preceding these 
regulations were submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal authors of these regulations are Barbara E. Pie and 
Mireille T. Khoury, Office of Division Counsel/Associate Chief Counsel 
(Tax Exempt and Government Entities).

List of Subjects in 26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 54 is amended as follows:

PART 54--PENSION EXCISE TAXES

0
Paragraph 1. The authority citation for part 54 is amended by adding 
entries 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. Section 
54.4980G-2 also issued under 26 U.S.C. 4980G. Section 54.4980G-3 
also issued under 26 U.S.C. 4980G. Section 54.4980G-4 also issued 
under 26 U.S.C. 4980G. Section 54.4980G-5 also issued under 26 
U.S.C. 4980G. * * *


0
Par. 2. Sections 54.4980G-0, 54.4980G-1, 54.4980G-2, 54.4980G-3, 
54.4980G-4, and 54.4980G-5 are added to read as follows:


Sec.  54.4980G-0  Table of contents.

    This section contains the questions for Sec. Sec.  54.4980G-1, 
54.4980G-2, 54.4980G-3, 54.4980G-4, and 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 Employee for comparability testing.

    Q-1: Do the comparability rules apply to contributions that an 
employer makes to the HSAs of independent contractors or self-
employed individuals?
    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: Are employees who are included in a unit of employees 
covered by a collective bargaining agreement comparable 
participating employees?
    Q-7: 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-8: 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-9: Does an employer that makes HSA contributions only for one 
class of non-collectively bargained employees who are eligible 
individuals, but not for another class of non-collectively bargained 
employees who are eligible individuals (for example, management v. 
non-management) satisfy the requirement that the employer make 
comparable contributions?
    Q-10: If an employer contributes to the HSAs of former employees 
who are eligible individuals, do the comparability rules apply to 
these contributions?
    Q-11: 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-12: 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))?
    Q-13: 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 does an employer comply with the comparability rules 
when some non-collectively bargained employees who are eligible 
individuals do not work for the employer during the entire calendar 
year?
    Q-3: How do the comparability rules apply to employer 
contributions to employees' HSAs if some non-collectively bargained 
employees work full-time during the entire calendar year, and other 
non-collectively bargained employees work full-time for less than 
the entire calendar year?
    Q-4: May an employer make contributions for the entire year 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

[[Page 43059]]

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 are eligible to make 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?
    Q-13: What constitutes a reasonable interest rate for purposes 
of making comparable contributions?

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 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-4: 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 are in the same category of employees and 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 of this section for the categories 
of HDHP coverage. But see Q & A-6 in Sec.  54.4980G-3 for treatment of 
collectively bargained employees.
    Q-2: What are the categories of HDHP coverage for purposes of 
applying the comparability rules?
    A-2: (a) In general. Generally, the categories of coverage are 
self-only HDHP coverage and family HDHP coverage. Family HDHP coverage 
means any coverage other than self-only HDHP coverage. The 
comparability rules apply separately to self-only HDHP coverage and 
family HDHP coverage. In addition, if an HDHP has family coverage 
options meeting the descriptions listed in paragraph (b) of this Q & A-
2, each such coverage option may be treated as a separate category of 
coverage and the comparability rules may be applied separately to each 
category. However, if the HDHP has more than one category that provides 
coverage for the same number of individuals, all such categories are 
treated as a single category for purposes of the comparability rules. 
Thus, the categories of ``employee plus spouse'' and ``employee plus 
dependent,'' each providing coverage for two individuals, are treated 
as the single category ``self plus one'' for comparability purposes. 
See, however, the final sentence of paragraph (a) of Q & A-1 of 
Sec. 54.4980G-4 for a special rule that applies if different amounts 
are contributed for different categories of family coverage.
    (b) HDHP Family coverage categories. The coverage categories are--
    (1) Self plus one;
    (2) Self plus two; and
    (3) Self plus three or more.
    (c) Examples. The rules of this Q & A-2 are illustrated by the 
following examples:

    Example 1. Employer A maintains an HDHP and contributes to the 
HSAs of eligible employees who elect coverage under the HDHP. The 
HDHP has self-only coverage and family coverage. Thus, the 
categories of coverage are self-only and family coverage. Employer A 
contributes $750 to the HSA of each eligible employee with self-only 
HDHP coverage and $1,000 to the HSA of each eligible employee with 
family HDHP coverage. Employer A's contributions satisfy the 
comparability rules.
    Example 2.  (i) Employer B maintains an HDHP and contributes to 
the HSAs of eligible employees who elect coverage under the HDHP. 
The HDHP has the following coverage options:
    (A) Self-only;
    (B) Self plus spouse;
    (C) Self plus dependent;
    (D) Self plus spouse plus one dependent;
    (E) Self plus two dependents; and
    (F) Self plus spouse and two or more dependents.
    (ii) The self plus spouse category and the self plus dependent 
category constitute the same category of HDHP coverage (self plus 
one) and Employer B must make the same comparable contributions to 
the HSAs of all eligible individuals who are in either the self plus 
spouse category of HDHP coverage or the self plus dependent category 
of HDHP coverage. Likewise, the self plus spouse plus one dependent 
category and the self plus two dependents category constitute the 
same category of HDHP coverage (self plus two) and Employer B must 
make the same comparable contributions to the HSAs of all eligible 
individuals who are in either the self plus spouse plus one 
dependent category of HDHP coverage or the self plus two dependents 
category of HDHP coverage.
    Example 3. (i) Employer C maintains an HDHP and contributes to 
the HSAs of eligible employees who elect coverage under the HDHP. 
The HDHP has the following coverage options:
    (A) Self-only;
    (B) Self plus one;
    (C) Self plus two; and
    (D) Self plus three or more.
    (ii) Employer C contributes $500 to the HSA of each eligible 
employee with self-only HDHP coverage, $750 to the HSA of each 
eligible employee with self plus one HDHP coverage, $900 to the HSA 
of each eligible employee with self plus two HDHP coverage and 
$1,000 to the HSA of each eligible employee with self plus three or 
more HDHP coverage. Employer C's contributions satisfy the 
comparability rules.

    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). See Q 
& A-3 and Q & A-4 in Sec. 54.4980G-4 for a discussion of HSA 
contribution methods.
    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. During the 2007 calendar year, Employer D has 8 
employees who are eligible individuals with self-only coverage under 
an HDHP provided by Employer D. The deductible for the HDHP is 
$2,000. For the 2007 calendar year, Employer D 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

[[Page 43060]]

$10,000. Employer D's contributions do not satisfy the comparability 
rules. Therefore, Employer D is subject to an excise tax of $3,500 
(35% of $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).


Sec.  54.4980G-3  Employee for comparability testing.

    Q-1: Do the comparability rules apply to contributions that an 
employer makes to the HSAs of independent contractors or self-employed 
individuals?
    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 the sole proprietor 
makes to his or her own HSA. However, if a sole proprietor contributes 
to any employee's HSA, the sole proprietor 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 any 
employee who is not a partner, the partnership must make comparable 
contributions to the HSAs of all comparable participating employees.
    (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 (but see Q & A-6 of this section for the 
treatment of collectively bargained employees)--
    (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. For purposes of section 
4980G, 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. Except as provided in Q & A-6 of this section, the 
categories of employees in paragraph (a) of this Q & A-5 are the 
exclusive categories of employees 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. For example, full-time eligible employees with 
self-only HDHP coverage and part-time eligible employees with self-only 
HDHP coverage are separate categories of employees and different 
amounts can be contributed to the HSAs for each of these categories.
    Q-6: Are employees who are included in a unit of employees covered 
by a collective bargaining agreement comparable participating 
employees?
    A-6: (a) In general. No. Collectively bargained employees who are 
covered by a bona fide collective bargaining agreement between employee 
representatives and one or more employers are not comparable 
participating employees, if health benefits were the subject of good 
faith

[[Page 43061]]

bargaining between such employee representatives and such employer or 
employers. Former employees covered by a collective bargaining 
agreement also are not comparable participating employees.
    (b) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-6. The examples read as follows:

    Example 1. Employer A offers its employees an HDHP with a $1,500 
deductible for self-only coverage. Employer A has collectively 
bargained and non-collectively bargained employees. The collectively 
bargained employees are covered by a collective bargaining agreement 
under which health benefits were bargained in good faith. In the 
2007 calendar year, Employer A contributes $500 to the HSAs of all 
eligible non-collectively bargained employees with self-only 
coverage under Employer A's HDHP. Employer A does not contribute to 
the HSAs of the collectively bargained employees. Employer A's 
contributions to the HSAs of non-collectively bargained employees 
satisfy the comparability rules. The comparability rules do not 
apply to collectively bargained employees.
    Example 2. Employer B offers its employees an HDHP with a $1,500 
deductible for self-only coverage. Employer B has collectively 
bargained and non-collectively bargained employees. The collectively 
bargained employees are covered by a collective bargaining agreement 
under which health benefits were bargained in good faith. In the 
2007 calendar year and in accordance with the terms of the 
collective bargaining agreement, Employer B contributes to the HSAs 
of all eligible collectively bargained employees. Employer B does 
not contribute to the HSAs of the non-collectively bargained 
employees. Employer B's contributions to the HSAs of collectively 
bargained employees are not subject to the comparability rules 
because the comparability rules do not apply to collectively 
bargained employees. Accordingly, Employer B's failure to contribute 
to the HSAs of the non-collectively bargained employees does not 
violate the comparability rules.
    Example 3. Employer C has two units of collectively bargained 
employees--unit Q and unit R--each covered by a collective 
bargaining agreement under which health benefits were bargained in 
good faith. In the 2007 calendar year and in accordance with the 
terms of the collective bargaining agreement, Employer C contributes 
to the HSAs of all eligible collectively bargained employees in unit 
Q. In accordance with the terms of the collective bargaining 
agreement, Employer C makes no HSA contributions for collectively 
bargained employees in unit R. Employer C's contributions to the 
HSAs of collectively bargained employees are not subject to the 
comparability rules because the comparability rules do not apply to 
collectively bargained employees.
    Example 4. Employer D has a unit of collectively bargained 
employees that are covered by a collective bargaining agreement 
under which health benefits were bargained in good faith. In 
accordance with the terms of the collective bargaining agreement, 
Employer D contributes an amount equal to a specified number of 
cents per hour for each hour worked to the HSAs of all eligible 
collectively bargained employees. Employer D's contributions to the 
HSAs of collectively bargained employees are not subject to the 
comparability rules because the comparability rules do not apply to 
collectively bargained employees.

    Q-7: 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-7: (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.
    (b) Non-employer provided HDHP coverage. An employer that 
contributes to the HSA of any employee who is an eligible individual 
with coverage under any HDHP that is not an HDHP 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. An employer that makes a reasonable good faith effort 
to identify all comparable participating employees with non-employer 
provided HDHP coverage and makes comparable contributions to the HSAs 
of such employees satisfies the requirements in paragraph (b) of this Q 
& A-7.
    (c) Examples. The following examples illustrate the rules in this Q 
& A-7. None of the employees in the following examples are covered by a 
collective bargaining agreement. The examples read as follows:

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

    Example 3. 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 also to the HSAs of full-time employees 
who are eligible individuals and who are not covered under Employer 
G's HDHP. Employee S, a full-time employee of Employer G and a 
comparable participating employee, is covered under an HDHP provided 
by the employer of S's spouse and not under Employer G's HDHP. 
Employer G must make comparable contributions to S's HSA.

    Q-8: 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-8: (a) In general. If the employer makes contributions only to 
the HSAs of employees who are eligible individuals covered under its 
HDHP where only one employee-spouse has family coverage for both 
employees under the employer's 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 an HDHP that is not an HDHP provided by the employer, 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-8. None of the employees in the following 
examples are covered by a collective bargaining agreement. The examples 
read as follows:

    Example 1. In a calendar year, Employer H offers an HDHP to its 
full-time employees. Most full-time employees are covered under 
Employer H's HDHP and Employer H makes

[[Page 43062]]

comparable contributions only to these employees' HSAs. T and U are 
a married couple. Employee T, who is a full-time employee of 
Employer H and an eligible individual, has family coverage under 
Employer H's HDHP for T and T's spouse. Employee U, who is also a 
full-time employee of Employer H and an eligible individual, does 
not have coverage under Employer H's HDHP except as the spouse of 
Employee T. Employer H is required to make comparable contributions 
to T's HSA, but is not required to make comparable contributions to 
U's HSA.
    Example 2. In a calendar year, Employer J offers an HDHP to its 
full-time employees. Most full-time employees are covered under 
Employer J's HDHP and Employer J 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 J's HDHP. R 
and S are a married couple. Employee S, who is a full-time employee 
of Employer J and an eligible individual, has family coverage under 
Employer J's HDHP for S and S's spouse. Employee R, who is also a 
full-time employee of Employer J and an eligible individual, does 
not have coverage under Employer J's HDHP except as the spouse of 
Employee S. Employer J must make comparable contributions to S's HSA 
and to R's HSA.

    Q-9: Does an employer that makes HSA contributions only for one 
class of non-collectively bargained employees who are eligible 
individuals, but not for another class of non-collectively bargained 
employees who are eligible individuals (for example, management v. non-
management) satisfy the requirement that the employer make comparable 
contributions?
    A-9: (a) Different classes of employees.

    No. If the two classes of employees are comparable participating 
employees, the comparability rules are not satisfied. The only 
categories of employees for comparability purposes are current full-
time employees, current part-time employees, and former employees. 
Collectively bargained employees are not comparable participating 
employees. But see Q & A-1 in 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-9. None of the employees in the following 
examples are covered by a collective bargaining agreement. The examples 
read as follows:

    Example 1. In a calendar year, Employer K maintains an HDHP 
covering all management and non-management employees. Employer K 
contributes to the HSAs of non-management employees who are eligible 
individuals covered under its HDHP. Employer K does not contribute 
to the HSAs of its management employees who are eligible individuals 
covered under its HDHP. The comparability rules are not satisfied.
    Example 2. All of Employer L's employees are located in city X 
and city Y. In a calendar year, Employer L maintains an HDHP for all 
employees working in city X only. Employer L does not maintain an 
HDHP for its employees working in city Y. Employer L contributes 
$500 to the HSAs of city X employees who are eligible individuals 
with coverage under its HDHP. Employer L does not contribute to the 
HSAs of any of its city Y employees. The comparability rules are 
satisfied because none of the employees in city Y are covered under 
an HDHP of Employer L. (However, if any employees in city Y were 
covered by an HDHP of Employer L, Employer L could not fail to 
contribute to their HSAs merely because they work in a different 
city.)
    Example 3. Employer M has two divisions--division N and division 
O. In a calendar year, Employer M maintains an HDHP for employees 
working in division N and division O. Employer M contributes to the 
HSAs of division N employees who are eligible individuals with 
coverage under its HDHP. Employer M does not contribute to the HSAs 
of division O employees who are eligible individuals covered under 
its HDHP. The comparability rules are not satisfied.
    Q-10: If an employer contributes to the HSAs of former employees 
who are eligible individuals, do the comparability rules apply to these 
contributions?
    A-10: (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-12 of this section. The 
comparability rules apply separately to former employees because they 
are a separate category of covered employee. See Q & A-5 of this 
section. Also, former employees who were covered by a collective 
bargaining agreement immediately before termination of employment are 
not comparable participating employees. See Q & A-6 of this section.
    (b) Locating former employees. An employer making comparable 
contributions to former employees must take reasonable actions to 
locate any missing comparable participating former employees. In 
general, such actions include the use of certified mail, the Internal 
Revenue Service Letter Forwarding Program or the Social Security 
Administration's Letter Forwarding Service.
    (c) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-10. None of the employees in the following 
examples are covered by a collective bargaining agreement. The examples 
read as follows:

    Example 1. In a calendar year, Employer N 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 N does 
not contribute to the HSA of any former employee who is an eligible 
individual. Employer N's contributions satisfy the comparability 
rules.
    Example 2. In a calendar year, Employer O contributes to the 
HSAs of current employees and former employees who are eligible 
individuals covered under any HDHP. Employer O 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 O 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 O's 
contributions satisfy the comparability rules.

    Q-11: 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-11: 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 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 an HDHP that is not an HDHP of the 
employer, 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-12: 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

[[Page 43063]]

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-12: 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-13: How do the comparability rules apply if some employees have 
HSAs and other employees have Archer MSAs?
    A-13: (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) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-13:

    Example. In a calendar year, Employer P contributes $600 to the 
Archer MSA of each employee who is an eligible individual and who 
has an Archer MSA. Employer P 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 P contributes to the employee's Archer MSA and not to the 
employee's HSA. Employee X has an Archer MSA and an HSA. Employer P 
contributes $600 for the calendar year to X's Archer MSA but does 
not contribute to X's HSA. Employer P'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, for each 
month in a calendar year, the contributions 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 on the 
first day of that month. Employees with self-only HDHP coverage are 
tested separately from employees with family HDHP coverage. Similarly, 
employees with different categories of family HDHP coverage may be 
tested separately. See 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 one category 
of HDHP coverage that it contributes for employees who are eligible 
individuals with a different category of HDHP coverage. For example, 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. However, the contribution with respect to the self plus two 
category may not be less than the contribution with respect to the self 
plus one category and the contribution with respect to the self plus 
three or more category may not be less than the contribution with 
respect to the self plus two category.
    (b) Examples. The following examples illustrate the rules in 
paragraph (a) of this Q & A-1. None of the employees in the following 
examples are covered by a collective bargaining agreement. The examples 
read as follows:

    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 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 the following coverage options--
    (A) A $2,500 deductible for self-only coverage;
    (B) A $3,500 deductible for self plus one dependent (self plus 
one);
    (C) A $3,500 deductible for self plus spouse (self plus one);
    (D) A $3,500 deductible for self plus spouse and one dependent 
(self plus two); and
    (E) A $3,500 deductible for self plus spouse and two or more 
dependents (self plus three or more).
    (ii) Employer F makes the following contributions for the 
calendar year to the

[[Page 43064]]

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) $1,500 for self plus spouse and one dependent; and
    (E) $2,000 for self plus spouse and two or more dependents.
    (iii) Employer F's HSA contributions satisfy the comparability 
rules.
    Example 7. (i) In a calendar year, Employer G 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 G's employees have 
coverage under the HDHP and the health FSA, some have coverage under 
the HDHP and their spouse's FSA, and some have coverage under the 
HDHP and are enrolled in Medicare. For the calendar year, Employer G 
contributes $500 to the HSA of each employee who is an eligible 
individual. No contributions are made to the HSAs of employees who 
have coverage under Employer G's health FSA or under a spouse's 
health FSA or who are enrolled in Medicare.
    (ii) The employees who have coverage under a health FSA (whether 
Employer H's or their spouse's FSA) or who are covered under 
Medicare are not eligible individuals. Specifically, 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 G's 
contributions satisfy the comparability rules.

    Q-2: How does an employer comply with the comparability rules when 
some non-collectively bargained employees who are eligible individuals 
do not work for the employer during the entire calendar year?
    A-2: (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 
dates during the calendar year to the HSAs of employees who are 
eligible individuals as of the first day of the month, 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-2: The examples read as follows:

    Example 1. (i) Beginning on January 1st, Employer H contributes 
$50 per month on the first day of each month to the HSA of each 
employee who is an eligible individual on that date. Employer H 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 H has contributed $150 to X's HSA. After X terminates 
employment, Employer H does not contribute additional amounts to X's 
HSA. In mid-April of the same year, Employer H 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 H 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 H hires Employee Z, an eligible individual. 
Employer H does not contribute to Z's HSA. After Z is hired, 
Employer H does not hire additional employees. As of the end of the 
calendar year, Employer H has made the following HSA contributions 
to its employees' HSAs--
    (A) Employer H contributed $150 to X's HSA;
    (B) Employer H contributed $100 to Y's HSA;
    (C) Employer H did not contribute to Z's HSA; and
    (D) Employer H contributed $300 to the HSA of each employee who 
was an eligible individual and employed by Employer J from January 
through June.
    (ii) Employer H's contributions satisfy the comparability rules.
    Example 2. In a calendar year, Employer J 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 J's HDHP. In the calendar year, Employer J 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 31th of the calendar 
year, Employee X is an eligible individual with self-only HDHP 
coverage. From April 1st through December 31th 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 
J contributes $50 per month to X's HSA. For the remaining months of 
the calendar year, Employer J contributes $100 per month to X's HSA. 
Employer J'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 same percentage of the 
HDHP deductible or the same dollar amount to the HSAs of all employees 
with the same category of coverage for that month.
    (e) Examples. The following examples illustrate the rules in 
paragraph (d) of this Q & A-2. The examples read as follows:

    Example 1. In a calendar year, Employer K 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 
K's HDHP. Employer K contributes $600 ($50 per month) for the 
calendar year to the HSA of each of employee with self-only HDHP 
coverage and $1,200 ($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 K 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 K's contributions to Y's HSA satisfy the comparability 
rules.
    Example 2. On December 31st, Employer L contributes $50 per 
month on a look-back basis to each employee's HSA for each month in 
the calendar year that the employee was an eligible individual. In 
mid-March of the same year, Employee T, an eligible individual, 
terminated employment. In mid-April of the same year, Employer L 
hired Employee U, who becomes an eligible individual as of May 1st 
and works for Employer L through December 31st. On December 31st, 
Employer L contributes $150 to Employee T's HSA and $400 to Employee

[[Page 43065]]

U's HSA. Employer L's contributions satisfy the comparability rules.

    (f) Periods and dates for making contributions. With both the pay-
as-you-go method and the look-back method, an employer may establish, 
on a reasonable and consistent basis, periods for which contributions 
will be made (for example, a quarterly period covering three 
consecutive months in a calendar year) and the dates on which such 
contributions will be made for that designated period (for example, the 
first day of the quarter or the last day of the quarter in the case of 
an employer who has established a quarterly period for making 
contributions). An employer that makes contributions on a pay-as-you-go 
basis for a period covering more than one month will not fail to 
satisfy the comparability rules because an employee who terminates 
employment prior to the end of the period for which contributions were 
made has received more contributions on a monthly basis than employees 
who have worked the entire period. In addition, an employer that makes 
contributions on a pay-as-you-go basis for a period covering more than 
one month must make HSA contributions for any comparable participating 
employees hired after the date of initial funding for that period.
    (g) Example. The following example illustrates the rules in 
paragraph (f) of this Q & A-2:

    Example. Employer M has established, on a reasonable and 
consistent basis, a quarterly period for making contributions to the 
HSAs of eligible employees on a pay-as-you-go basis. Beginning on 
January 1st, Employer M contributes $150 for the first three months 
of the calendar year to the HSA of each employee who is an eligible 
individual on that date. On January 15th, Employee V, an eligible 
individual, terminated employment after Employer M has contributed 
$150 to V's HSA. On January 15th, Employer M hired Employee W, who 
becomes an eligible individual as of February 1st. On April 1st, 
Employer M has contributed $100 to W's HSA for the two months 
(February and March) in the quarter period that Employee W was an 
eligible employee. Employer M's contributions satisfy the 
comparability rules.

    Q-3: How do the comparability rules apply to employer contributions 
to employees' HSAs if some non-collectively bargained employees work 
full-time during the entire calendar year, and other non-collectively 
bargained employees work full-time for less than the entire calendar 
year?
    A-3: 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 each full-time employee who works on 
the first day of each three months of the calendar year. The rules set 
forth in 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 of this 
section. See sections 4980G(b) and 4980E(d)(2)(B).
    Q-4: May an employer make contributions for the entire year to the 
HSAs of its employees who are eligible individuals at the beginning of 
the calendar year (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 contributions for the entire year 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 work the entire 
calendar year. See Q & A-12 of 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 N contributes $1,200 for the 
calendar year on a pre-funded basis to the HSA of each employee who 
is an eligible individual. In mid-May, Employer N hires Employee B, 
who becomes an eligible individual as of June 1st. Therefore, 
Employer N is required to make comparable contributions to B's HSA 
beginning in June. Employer N 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-2 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 as of the first day of the month. 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 and 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 of 
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 at the time the 
employer funds its employees' HSAs. 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 plus reasonable interest to the employee's HSA when the 
employee establishes the HSA, taking into account each month that the 
employee was a comparable participating employee. See Q & A-13 of this 
section for rules regarding reasonable interest.

[[Page 43066]]

    (b) Employee has not established an HSA by the end of the calendar 
year. [Reserved].
    (c) Example. The following example illustrates the rules in 
paragraph (a) of this Q & A-6:

    Example. Beginning on January 1st, Employer O 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 O must make up the missed HSA contributions plus reasonable 
interest 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 the 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 each 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 are eligible to make 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 are not 
eligible to make 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). See Q & A-13 of this section for rules 
regarding reasonable interest.
    Q-13: What constitutes a reasonable interest rate for purposes of 
making comparable contributions?
    A-13: The determination of whether a rate of interest used by an 
employer is reasonable will be based on all of the facts and 
circumstances. If an employer calculates interest using the Federal 
short-term rate as determined by the Secretary in accordance with 
section 1274(d), the employer is deemed to use a reasonable interest 
rate.


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: (a) In general. 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 through 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 the 
regulations thereunder.
    (b) Contributions made through a section 125 cafeteria plan. 
Employer contributions to employees' HSAs are made through a section 
125 cafeteria plan and are subject to the section 125 cafeteria plan 
nondiscrimination rules and not the comparability rules if under the 
written cafeteria plan, the employees have the right to elect to 
receive cash or other taxable benefits in lieu of all or a portion of 
an HSA contribution (meaning that all or a portion of the HSA 
contributions are available as pre-tax salary reduction amounts), 
regardless of whether an employee actually elects to contribute any 
amount to the HSA by salary reduction.
    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

[[Page 43067]]

contribution or a percentage of the amount of the employee's HSA 
contribution (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 
of this section.
    Q-3: 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 and the employees have the right to elect to 
make pre-tax salary reduction contributions to their HSAs, are the 
contributions subject to the comparability rules?
    A-3: (a) In general. No. The comparability rules do not apply to 
employer contributions to an HSA made through a cafeteria plan. See Q & 
A-1 of this section.
    (b) Examples. The following examples illustrate the rules in this 
Sec.  54.4980G-5. The examples read as follows:

    Example 1. Employer A's written cafeteria plan permits employees 
to elect to make pre-tax salary reduction contributions to their 
HSAs. Employees making this election have the right to receive cash 
or other taxable benefits in lieu of their HSA pre-tax contribution. 
The section 125 cafeteria plan nondiscrimination rules and not the 
comparability rules apply because the HSA contributions are made 
through the cafeteria plan.
    Example 2. Employer B's written cafeteria plan permits employees 
to elect to make pre-tax salary reduction contributions to their 
HSAs. Employees making this election have the right to receive cash 
or other taxable benefits in lieu of their HSA pre-tax contribution. 
Employer B automatically contributes a non-elective matching 
contribution or seed money to the HSA of each employee who makes a 
pre-tax HSA contribution. The section 125 cafeteria plan 
nondiscrimination rules and not the comparability rules apply to 
Employer B's HSA contributions because the HSA contributions are 
made through the cafeteria plan.
    Example 3. Employer C's written cafeteria plan permits employees 
to elect to make pre-tax salary reduction contributions to their 
HSAs. Employees making this election have the right to receive cash 
or other taxable benefits in lieu of their HSA pre-tax contribution. 
Employer C makes a non-elective contribution to the HSAs of all 
employees who complete a health risk assessment and participate in 
Employer C's wellness program. Employees do not have the right to 
receive cash or other taxable benefits in lieu of Employer C's non-
elective contribution. The section 125 cafeteria plan 
nondiscrimination rules and not the comparability rules apply to 
Employer C's HSA contributions because the HSA contributions are 
made through the cafeteria plan.
    Example 4. Employer D's written cafeteria plan permits employees 
to elect to make pre-tax salary reduction contributions to their 
HSAs. Employees making this election have the right to receive cash 
or other taxable benefits in lieu of their HSA pre-tax contribution. 
Employees participating in the plan who are eligible individuals 
receive automatic employer contributions to their HSAs. Employees 
make no election with respect to Employer D's contribution and do 
not have the right to receive cash or other taxable benefits in lieu 
of Employer D's contribution but are permitted to make their own 
pre-tax salary reduction contributions to fund their HSAs. The 
section 125 cafeteria plan nondiscrimination rules and not the 
comparability rules apply to Employer D's HSA contributions because 
the HSA contributions are made through the cafeteria plan.

    Q-4: May all or part of the excise tax imposed under section 4980G 
be waived?
    A-4: 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).

    Approved: July 14, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary (Tax Policy).
 [FR Doc. E6-11991 Filed 7-28-06; 8:45 am]
BILLING CODE 4830-01-P