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We’ve compiled a list of the 100 most commonly asked questions we have received on the federal Fair Labor Standards Act (FLSA) overtime regulations.
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This report, "Top 100 FLSA Q&As", is designed to provide you with an examination of the federal FLSA overtime regulations in Q&A format, including valuable tips for bringing your workplace into compliance in an affordable manner.

At the end of the report, you will find a list of state resources on wage and hour issues. This report includes practical advice on topics such as:
  • FLSA Coverage: How FLSA regulations apply to all employers and any specific exemptions from the overtime requirements
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April 15, 2005
IRS Continues to Clarify Rules for Employer Participation in HSAs

For a Limited Time receive a FREE Compensation Special Report on the "Top 100 FLSA Q&As," designed to provide you with an examination of the federal FLSA Overtime Regulations in Q&A format, including valuable tips for FLSA Coverage, Salary Level, and Deductions from Pay. Download Now
The Medicare Prescription Drug Improvement, and Modernization Act of 2003 became effective January 1, 2004. The provision of the Act that added Section 223, Health Savings Accounts, to the Internal Revenue Code (IRC), received, at first, very little attention. In the ensuing months, however, it was given major media scrutiny.

Health savings accounts (HSAs) are now being viewed as a significant healthcare development for the new "ownership" society, and one that provides employers with a cheaper way of providing employee health benefits. The New York Times noted last fall that, because small businesses were showing an interest in HSAs, the group insurance market for small businesses was taking notice and creating new products.

Need for Continuing Clarification

Although Section 223 of the IRC is only several pages long, it is far from self-explanatory and has raised many issues requiring interpretation. The Internal Revenue Service (IRS) has provided guidance on several occasions, but each set of answers seems to raise more questions. Recently, the IRS revised both Publication 969, Health Savings Accounts and Other Tax-Favored Plans, and its list of "frequently asked questions" (FAQs) about HSAs. Here, we will look at some of these IRS revisions, with an emphasis on rules governing employer participation in HSAs.

Benefit for Employers

In general, an HSA is a tax-exempt trust, or custodial account, set up for the purpose of paying current "qualified medical expenses" and also for the purpose of saving-- on a tax-free basis--money to pay for future medical and retiree health expenses. (According to the latest FAQs, the difference between an HSA "custodian" and an HSA "trustee" is minor and is governed by state law. In brief, the trustee has some discretionary, fiduciary authority and the custodian doesn't.)

An HSA can be established only for the benefit of an individual who is covered under a "high deductible health plan" (HDHP). According to the recent FAQs posted by the IRS, an HDHP is sometimes referred to as a "catastrophic" health insurance plan and is an inexpensive health insurance plan that generally doesn't pay for the first several thousand dollars of healthcare expenses (i.e., the deductible) but will usually provide coverage after that. In order to open an HSA, the HDHP minimum deductible must be at least $1,000 (self-only coverage) or $2,000 (family coverage). The annual out-of-pocket expenses (including deductibles and co-pays) cannot exceed $5,100 (self-only coverage) or $10,200 (family coverage). HDHPs can have first dollar coverage (no deductible) for preventive care and apply higher out-of-pocket limits (and co-pays and coinsurance) for out-of-network services.

Since an HDHP costs much less than a traditional policy because of the high deductible, this makes HSAs of interest to employers seeking to provide an employee health benefit that won't bankrupt the company.

Benefit for Employees

Putting aside the negative factor of the high deductible, the HSA offers the account beneficiary of an HSA many positives, including the following:

  1. The HSA beneficiary may claim a tax deduction for contributions that an employee, or someone other than his employer, makes to his or her HSA, even if the employee does not itemize his or her deductions on Form 1040.
  2. The beneficiary may exclude from the gross income contributions made to his or her HSA by the employer (including contributions made through a cafeteria plan).
  3. The contributions remain in the beneficiary's account until he or she uses them.
  4. The interest or other earnings on the assets in the account are tax-free.
  5. Distributions from the account may be tax-free if they are used to pay qualified medical expenses.
  6. The HSA is portable; it stays with the beneficiary if an employee changes employers or leaves the workforce. The employee fully owns the contributions in the account as soon as they are deposited; the employer does not own his employees' HSAs and has no control over how the money in the HSAs is spent. Furthermore, even though an individual has an HSA but no longer maintains HDHP coverage, the money that is already in the HSA may continue to be withdrawn tax-free to pay for qualified medical expenses. There is no time limit on using the funds.

Employer Participation In HSAs

Recently revised Publication 969 discusses, among many other things, the rules employers must follow if they decide to make HSAs available to their employees. First, employers are advised that if they want their employees to be able to have an HSA, the employees must have HDHPs. Employers can provide no additional insurance coverage other than those exceptions listed in Pub. 969 under "Other health coverage."

The exception for "other health coverage" permits additional coverage for the following items: (1) liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property; 2) a specific disease or illness; and 3) a fixed amount per day (or other period) of hospitalization. Additional coverage also may be for accidents, disability, dental care, vision care, and long-term care.

Employer Contributions And Comparability Rules

Employers making contributions to HSAs on behalf of employees must be aware of the so-called comparability rules. Under these rules, if the employer decides to make contributions, he or she must make comparable contributions to the HSAs of all "comparable participating employees." Comparable participating employees:

  • Are covered by the employer's HDHP and eligible to establish an HSA.
  • Have the same category of coverage (either self-only or family coverage).
  • Have the same category of employment (either part-time or full-time).

The employer's contributions are comparable if they are either: (1) the same amount, or (2) the same percentage of the annual deductible limit under the HDHP covering the employees.

Pub. 969 specifically states that: "The comparability rules do not apply to contributions made through a cafeteria plan."

Cafeteria plans, or salary reduction plans, also known as Section 125 plans, must meet a different set of rules. Under these rules, contributions (both from the employer and/or the employee) must meet "nondiscrimination" rules.

These rules require the employer to ensure that contributions do not favor higher compensated employees.

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