Question: Under our company’s cafeteria plan, qualifying participants can make pretax salary reduction contributions to their Health Savings Accounts (HSAs). Can our company make matching contributions based on a percentage of participants’ pretax HSA contributions?
Answer: Probably. Some employers’ HSA contributions are subject to strict comparability requirements that effectively prohibit matching contributions because the contributions would trigger a 35% excise tax on the employer. To be comparable, contributions generally must be the same dollar amount or the same percentage of the high-deductible health plan deductible ― a standard that matching contributions cannot satisfy.
But the comparability requirements don’t apply to employer HSA contributions that are made “through a cafeteria plan.” Because your company’s cafeteria plan permits eligible participants to make pretax salary reduction contributions to their HSAs, any matching (or other) employer contributions would also be treated as made “through a cafeteria plan.”
Instead of comparability, your company’s contributions (as well as participants’ pretax HSA contributions) would be subject to Internal Revenue Code Section 125’s nondiscrimination requirements. Sec. 125 addresses:
- Contributions and benefits, and
- Key employee concentration tests.
Generally, these tests provide more flexibility for employers wishing to vary HSA contributions on a nondiscriminatory basis. But even that flexibility has its limits. For example, if nonkey employees make only small contributions or don’t contribute at all, contributions by key employees could cause the cafeteria plan to fail the key employee concentration tests. Thus, any matching contribution should be carefully designed to satisfy the applicable nondiscrimination rules.
Matching HSA contributions (like other employer HSA contributions) are typically treated as employer-provided coverage for medical expenses under an accident or health plan. Therefore, they’re excludable from a participant’s gross income.
They also will be taken into account when determining whether your company is subject to the Affordable Care Act’s excise tax on high-cost health coverage. Commonly referred to as the “Cadillac tax,” this provision isn’t currently scheduled to take effect until January 1, 2020.
Once your company’s matching HSA contributions are made, they are nonforfeitable. That means they cannot be subject to a vesting schedule or be returned to the employer if the participant terminates employment midyear.
Aggregation a must
Keep in mind that HSA contributions are subject to annual dollar limitations. All contributions that are made for a year to a participant’s HSA — whether by the participant, your company, or another entity or individual — must be aggregated for purposes of applying these limits. If your company decides to make matching HSA contributions, this should be reflected in the cafeteria plan document, the cafeteria plan summary and other applicable communications (such as open enrollment materials).