[Federal Register Volume 72, Number 105 (Friday, June 1, 2007)]
[Proposed Rules]
[Pages 30501-30505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-10529]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG-143797-06]
RIN 1545-BF97


Employer Comparable Contributions to Health Savings Accounts 
Under Section 4980G

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations providing guidance 
on employer comparable contributions to Health Savings Accounts (HSAs) 
under section 4980G in instances where an employee has not established 
an HSA by December 31st and in instances where an employer accelerates 
contributions for the calendar year for employees who have incurred 
qualified medical expenses. In general, these proposed regulations 
affect employers that contribute to employees' HSAs. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by August 30, 
2007. Outlines of topics to be discussed at the public hearing 
scheduled for September 28, 2007, at 10 a.m., must be received by 
August 28, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-143797-06), Internal 
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. 
Submissions may be hand delivered to CC:PA:LPD:PR (REG-143797-06), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Federal eRulemaking Portal at 
www.regulations.gov (IRS REG-143797-06). The public hearing will be 
held in the IRS Auditorium, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Mireille Khoury at (202) 622-6080; concerning submissions of comments, 
the hearing, and/or to be placed on the building access list to attend 
the hearing, Kelly Banks at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:S 
Washington, DC 20224. Comments on the collection of information should 
be received by July 31, 2007.
    Comments are specifically requested concerning:

[[Page 30502]]

    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the IRS, including whether 
the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information; How the quality, utility, and clarity of the 
information to be collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these proposed regulations is in Q 
& A-14. This information is needed for purposes of making HSA 
contributions to employees who establish an HSA after the end of the 
calendar year but before the last day of February. The likely 
respondents are employers that contribute to employees' HSAs.
    Estimated total annual reporting burden: 1,250,000 hours.
    The estimated annual burden per respondent is: .25 hour.
    Estimated number of respondents: 5,000,000.
    The estimated annual frequency of responses: 1.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed Pension Excise Tax Regulations (26 
CFR part 54) under section 4980G of the Internal Revenue Code (Code). 
Under section 4980G, 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. Accordingly, 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 CB 269), Q & A-32. See 
Sec.  601.601(d)(2).
    On August 26, 2005, proposed regulations (REG-138647-04) on the 
comparability rules of section 4980G were published in the Federal 
Register (70 FR 50233). On July 31, 2006, final regulations (REG-
138647-04) on the comparability rules were published in the Federal 
Register (71 FR 43056). The final 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). Q & A-6(b) of the final regulations 
reserved the issue dealing with an employee who has not established an 
HSA by the end of the calendar year. These proposed regulations address 
that reserved issue and one additional issue concerning the 
acceleration of employer contributions.
    Section 4980G was amended by section 306 of the Tax Relief and 
Health Care Act of 2006, Public Law 109-432 (120 Stat. 2922), effective 
for taxable years beginning after December 31, 2006. The Treasury 
Department and IRS expect to publish guidance on the amendment to 
section 4980G.

Explanation of Provisions

Employee Has Not Established HSA by December 31

    The proposed regulations provide a means for employers to comply 
with the comparability requirements with respect to employees who have 
not established an HSA by December 31, as well as with respect to 
employees who may have established an HSA but not notified the employer 
of that fact. The proposed regulations provide that, in order to comply 
with the comparability rules for a calendar year with respect to such 
employees, the employer must comply with a notice requirement and a 
contribution requirement. In order to comply with the notice 
requirement, the employer must provide all such employees, by January 
15 of the following calendar year, written notice that each eligible 
employee who, by the last day of February, both establishes an HSA and 
notifies the employer that he or she has established the HSA will 
receive a comparable contribution to the HSA. For each such eligible 
employee who establishes an HSA and so notifies the employer by the end 
of February, the employer must contribute to the HSA by April 15 
comparable amounts (taking into account each month that the employee 
was a comparable participating employee) plus reasonable interest. The 
notice may be delivered electronically. The proposed regulations 
provide sample language that employers may use as a basis in preparing 
their own notices.

Acceleration of Employer Contributions

    The proposed regulations also address a second issue relating to 
acceleration of contributions. They provide that, for any calendar 
year, an employer may accelerate part or all of its contributions for 
the entire year to the HSAs of employees who have incurred during the 
calendar year qualified medical expenses exceeding the employer's 
cumulative HSA contributions at that time. If an employer accelerates 
contributions for this reason, these contributions must be available on 
an equal and uniform basis to all eligible employees throughout the 
calendar year and employers must establish reasonable uniform methods 
and requirements for acceleration of contributions and the 
determination of medical expenses. An employer is not required to 
contribute reasonable interest on either accelerated or non-accelerated 
HSA contributions. But see Q & A-6 and Q & A-12 in Sec.  54.4980G-4 for 
when reasonable interest must be paid.

Other Issues

    These proposed regulations concern only section 4980G. Other 
statutes may impose additional requirements (for example, the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA) (sections 
9801-9803)).

[[Page 30503]]

Proposed Effective Date

    It is proposed that these regulations apply to employer 
contributions made on or after the date the final regulations are 
published in the Federal Register. However, taxpayers may rely on these 
regulations for guidance pending the issuance of final regulations. 
Alternatively, until the publication of final regulations, an employer 
may continue to rely on the last sentence of Q&A 6(a) of Sec.  
54.4980G-4 of the proposed regulations published in the Federal 
Register on August 26, 2005, which provides that, an employer is not 
required to make comparable contributions for a calendar year to an 
employee's HSA if the employee has not established an HSA by December 
31st of the calendar year.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
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. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact the estimated burden 
associated with the information collection averages 15 minutes per 
respondent. Moreover, a model notice has been provided for employers 
who are subject to this collection of information any burden imposed on 
employees due to the collection of information in these regulations 
will be outweighed by the benefit of receiving HSA contributions. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. Chapter 6) is not required. Pursuant to 
section 7805(f) of the Internal Revenue Code, this regulation will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The IRS and Treasury Department request comments on the 
clarity of the proposed regulations and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for September 27, 2007, 
beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by August 30, 2007 and an outline of the topics to 
be discussed and the amount of time to be devoted to each topic (a 
signed original and eight (8) copies) August 28, 2007. A period of 10 
minutes will be allotted to each person for making comments. An agenda 
showing the scheduling of the speakers will be prepared after the 
deadline for receiving outlines has passed. Copies of the agenda will 
be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Mireille 
Khoury, Office of Division Counsel/Associate Chief Counsel (Tax Exempt 
and Government Entities), Internal Revenue Service. However, personnel 
from other offices of the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, 26 CFR part 54 is proposed to be amended as follows:

PART 54--PENSION EXCISE TAXES

    Paragraph 1. The authority citation for part 54 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 54.4980g-0 is amended by adding entries under Sec.  
54.4980g-4 for Q-14, Q-15 and Q-16 to read as follows:


Sec.  54.4980g-0  Table of contents.

* * * * *


Sec.  54.4980g-4  Calculating comparable contributions.

* * * * *
    Q-14: How does an employer comply with the comparability rules 
if an employee has not established an HSA by December 31st?
    Q-15: For any calendar year, may an employer accelerate part or 
all of its contributions for the entire year to the HSAs of 
employees who have incurred, during the calendar year, qualified 
medical expenses (as defined in section 223(d)(2)) exceeding the 
employer's cumulative HSA contributions at that time?
    Q-16: What is the effective date for the rules in Q & A-14 and 
15 of this section?

    Par. 3. Section 54.4980g-4 is amended by:
    1. Removing paragraph (b) and redesignating paragraph (c) as 
paragraph (b) in Q & A-6.
    2. Adding Q & A-14, Q & A-15 and Q & A-16.
    The additions read as follows:


Sec.  54.4980G-4  Calculating comparable contributions.

* * * * *
    Q-14: Does an employer fail to satisfy the comparability rules for 
a calendar year if the employer fails to make contributions with 
respect to eligible employees because the employee has not established 
an HSA or because the employer does not know that the employee has 
established an HSA?
    A-14: (a) In general. An employer will not fail to satisfy the 
comparability rules for a calendar year merely because the employer 
fails to make contributions with respect to an eligible employee 
because the employee has not established an HSA or because the employer 
does not know that the employee has established an HSA, if--
    (1) The employer provides timely written notice to all such 
eligible employees that it will make comparable contributions for 
eligible employees who, by the last day of February of the following 
calendar year, both establish an HSA and notify the employer (in 
accordance with a procedure specified in the notice) that they have 
established an HSA; and
    (2) For each such eligible employee who establishes an HSA and so 
notifies the employer on or before the last day of February of such 
following calendar year, the employer contributes to the HSA comparable 
amounts (taking into account each month that the employee was a 
comparable participating employee) plus reasonable interest by April 
15th of such following calendar year.
    (b) Notice. The notice described in paragraph (a) of this Q & A-14 
must be

[[Page 30504]]

provided to each eligible employee who has not established an HSA by 
December 31 or if the employer does not know if the employee 
established an HSA. The employer may provide the notice to other 
employees as well. However, if the employee has earlier notified the 
employer that he or she has established an HSA, or if the employer has 
previously made contributions to that employee's HSA, the employer may 
not condition making comparable contributions on receipt of any 
additional notice from that employee. For each calendar year, a notice 
is deemed to be timely if the employer provides the notice no earlier 
than 90 days before the first HSA employer contribution for that 
calendar year and no later than January 15 of the following calendar 
year.
    (c) Model notice. Employers may use the following sample language 
as a basis in preparing their own notices.

    Notice to Employees Regarding Employer Contributions to HSAs:
    This notice explains how you may be eligible to receive 
contributions from [employer] if you are covered by a High 
Deductible Health Plan (HDHP). [Employer] provides contributions to 
the Health Savings Account (HSA) of each employee who is [insert 
employer's eligibility requirements for HSA contributions] 
(``eligible employee''). If you are an eligible employee, you must 
do the following in order to receive an employer contribution:
    (1) Establish an HSA on or before the last day in February of 
[insert year after the year for which the contribution is being 
made] and;
    (2) Notify [insert name and contact information for appropriate 
person to be contacted] of your HSA account information on or before 
the last day in February of [insert year after year for which the 
contribution is being made]. [Specify the HSA account information 
that the employee must provide (e.g., account number, name and 
address of trustee or custodian, etc.) and the method by which the 
employee must provide this account information (e.g., in writing, on 
a certain form, etc.)].
    If you establish your HSA on or before the last day of February 
in [insert year after year for which the contribution is being made] 
and notify [employer] of your HSA account information, you will 
receive your HSA contributions, plus reasonable interest, for 
[insert year for which contribution is being made] by April 15 of 
[insert year after year for which contribution is being made]. If, 
however, you do not establish your HSA or you do not notify us of 
your HSA account information by the deadline, then we are not 
required to make any contributions to your HSA for [insert 
applicable year]. You may notify us that you have established an HSA 
by sending an [e-mail or] a written notice to [insert name, title 
and, if applicable, e-mail address]. If you have any questions about 
this notice, you can contact [insert name and title] at [insert 
telephone number or other contact information].

    (e) Electronic delivery. An employer may furnish the notice 
required under this section electronically. See Sec.  1.401(a)-21 of 
this chapter.
    (f) Examples. The following examples illustrate the rules in this Q 
& A-14:

    Example 1. In a calendar year, Employer Q contributes to the 
HSAs of current employees who are eligible individuals covered under 
any HDHP. For the 2009 calendar year, Employer Q contributes $50 per 
month on the first day of each month, beginning January 1st, to the 
HSA of each employee who is an eligible employee on that date. For 
the 2009 calendar year, Employer Q provides written notice 
satisfying the content requirements on October 16, 2008 to all 
employees regarding the availability of HSA contributions for 
eligible employees. For eligible employees who are hired after 
October 16, 2008, Employer Q provides such a notice no later than 
January 15, 2010. Employer Q's notice satisfies the notice 
requirements in paragraph (a)(1) of this Q & A-14.
    Example 2. Employer R'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 R automatically contributes a non-elective matching 
contribution to the HSA of each employee who makes a pre-tax HSA 
contribution. Because Employer R's HSA contributions are made 
through the cafeteria plan, the comparability requirements do not 
apply to the HSA contributions made by Employer R. Consequently, 
Employer R is not required to provide written notice to its 
employees regarding the availability of this matching HSA 
contribution. See Q & A-1 in Sec.  54.4980G-5 for treatment of HSA 
contributions made through a cafeteria plan.
    Example 3. In a calendar year, Employer S maintains an HDHP and 
only contributes to the HSAs of eligible employees who elect 
coverage under its HDHP. For the 2009 calendar year, Employer S 
employs ten eligible employees. For the 2009 calendar year, all ten 
employees have elected coverage under Employer S's HDHP and have 
established HSAs. For the 2009 calendar year, Employer S makes 
comparable contributions to the HSAs of all ten employees. Employer 
S satisfies the comparability rules. Thus, Employer S is not 
required to provide written notice to its employees regarding the 
availability of HSA contributions for eligible employees.
    Example 4. In a calendar year, Employer T contributes to the 
HSAs of current full-time employees with family coverage under any 
HDHP. For the 2009 calendar year, Employer T provides timely written 
notice satisfying the content requirements to all employees 
regardless of HDHP coverage. Employer T makes identical monthly 
contributions to all eligible employees (meaning full time employees 
with family HDHP coverage) that establish HSAs. Employer T 
contributes comparable amounts (taking into account each month that 
the employee was a comparable participating employee) plus 
reasonable interest to the HSAs of the eligible employees that 
establish HSAs and provide the necessary information after the end 
of the year but on or before the last day of February, 2010. 
Employer T makes no contribution to the HSAs of employees that do 
not establish an HSA and provide the necessary information on or 
before the last day of February, 2008. Employer T satisfies the 
comparability requirements.
    Example 5. For 2007, Employer V contributes to the HSAs of 
current full time employees with family coverage under any HDHP. 
Employer V has 500 current full time employees. As of the date for 
Employer V's first HSA contribution for the 2007 calendar year, 450 
employees have established HSAs. Employer V provides timely written 
notice satisfying the content requirements only to those 50 current 
full time employees who have not established HSAs. Employer V makes 
identical quarterly contributions to the 450 employees who 
established HSAs. Employer V contributes comparable amounts to the 
eligible employees who establish HSAs and provide the necessary 
information after the end of the year but on or before the last day 
of February, 2008. Employer V makes no contribution to the HSAs of 
employees that do not establish an HSA and provide the necessary 
information on or before the last day of February, 2008. Employer V 
satisfies the comparability rules.

    Q-15: For any calendar year, may an employer accelerate part or all 
of its contributions for the entire year to the HSAs of employees who 
have incurred, during the calendar year, qualified medical expenses (as 
defined in section 223(d)(2)) exceeding the employer's cumulative HSA 
contributions at that time?
    A-15: (a) In general. Yes. For any calendar year, an employer may 
accelerate part or all of its contributions for the entire year to the 
HSAs of employees who have incurred, during the calendar year, 
qualified medical expenses exceeding the employer's cumulative HSA 
contributions at that time. If an employer accelerates contributions to 
employees' HSAs, all accelerated contributions must be available 
throughout the calendar year on an equal and uniform basis to all 
eligible employees. Employers must establish reasonable uniform methods 
and requirements for accelerated contributions and the determination of 
medical expenses.
    (b) Satisfying comparability. An employer that accelerates 
contributions to the HSAs of its employees will not fail to satisfy the 
comparability rules because employees who incur qualifying medical 
expenses exceeding the employer's cumulative HSA contributions at that 
time have received more contributions in a given period than comparable 
employees who do not incur such expenses, provided that all comparable 
employees receive the same

[[Page 30505]]

amount or the same percentage for the calendar year. Also, an employer 
that accelerates contributions to 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. An employer is not required to contribute 
reasonable interest on either accelerated or non-accelerated HSA 
contributions. But see Q & A-6 and Q & A-12 of this section for when 
reasonable interest must be paid.
    Q-16: What is the effective date for the rules in Q & A-14 and 15 
of this section?
    A-16: It is proposed that these regulations apply to employer 
contributions made on or after the date the final regulations are 
published in the Federal Register. However, taxpayers may rely on these 
regulations for guidance pending the issuance of final regulations. 
Alternatively, until the publication of final regulations, an employer 
may continue to rely on the last sentence of Q&A 6(a) of section 
54.4980G-4 of the proposed regulations published in the Federal 
Register on August 26, 2005, which provides that, an employer is not 
required to make comparable contributions for a calendar year to an 
employee's HSA if the employee has not established an HSA by December 
31st of the calendar year.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-10529 Filed 5-31-07; 8:45 am]
BILLING CODE 4830-01-P