Folks, there seems to be some confusion on the HSA comparable rules and section 125. I read on this blog frequently where a question is posed that the employer made a mistake in funding for the employer contribution for employees and the comments are narrow. Focusing on the limited options in the HSA comparable rules. The good news is that employers have more flexible options under a section 125 plan nondiscrimination testing versus the HSA comparable rules. Another problem I see is that brokers don’t take into consideration the section 125 plan removes the comparable rules and provides for pre-tax deductions of employee funds. Let’s explore the possibilities when section 125 is in place.
For review here are the comparable rules from the HSA regulations.
1Comparable contributions are contributions to all HSAs of an employer:
Which are the same amount or which are the same percentage of the annual deductible
May count only employees who are “eligible individuals” covered by the employer under the HDHP and who have the “same category of coverage” (i.e., self-only or family).No other classifications of employees are permitted
Part-time employees can be tested separately. “Part-time” means customarily employed fewer than 30 hours per week
Employers may contribute more on behalf of non-highly compensated employees.
Comparability rules do not apply to collectively bargained employees.
Straight and no non-sense. But let’s add a twist called section 125 plans. Section 125 is a cafeteria plan. Cafeteria plans have many names. For example: Flex plans, FSA plans, POP plans. You get the picture.
2But NO PRE-TAX salary reductions (contributions) can happen if a section 125 plan is not present for the employees. That statement is clear from the regs.
Two monumental results happen when adding a cafeteria plan. The first is the benefit of pre-taxing of employee contributions, and the second is the HSA comparable rules are eliminated.
3Employer matching contributions to the HSA through a cafeteria plan are not subject to the comparability rules
But cafeteria plan nondiscrimination rules apply
Contributions cannot be greater for higher paid employees than they are for lower paid employees contributions that favor lower paid employees are OK
The next logical question is what can we do with the section 125 nondiscrimination testing that we can’t do with the HSA comparable rules? As a side note, section 125 nondiscrimination rules include the health care (PPACA) 105 nondiscrimination testing and those you should be familiar even though they are on the back burner.
Section 125 non-discrimination testing are flexible in many ways, and I like to drive my colleagues in the TPA compliance field a bit crazy by saying; “you can do almost anything with plan design for employees as long as it doesn’t benefit the KEY (owners by stock or corporate status) or Highly Compensated Employees (HCE) (by salary or position of authority such as officer) according to the nondiscrimination testing factors.
(See benefitblog.com for 2012 salary thresholds which include section 125 and retirement plans)
I have personally designed plans that allowed for funding of employer and employee contributions to staff with longevity (seniority), based on salary, percentage of salary, longevity and salary, logical business classes, full time, and part time etc.
I have even developed a nondiscrimination program for a Hardees Store chain based in Wisconsin. (Go Pack!) The group was experiencing 25% turnover each quarter. Their thought was that if they could increase benefits for employees that may slow the turnover statistic because of the high cost of training. Losing experienced staff, especially managers, was cutting into customer service and profits. The result was that when an employee was there for less than 1 year they could put in $300 into the Health FSA. 2 years gave them $750 and 3 years and beyond the sky was the limit.
Within six months I received a call telling me that the plan was popular and that the company had dropped turnover to 17% quarterly.
Another example was a hotel management chain. They had 300 employees. 75 were management. 225 were the hotel janitors, managers, cooks, and maids. Their question was how can they give immediate entry executive staff and 3 month entry to the management staff which had low turnover, were paid more. The next goal was to limit the entry to one year of service for the lower paid employees that managed and were on site at the hotels? Hint: This group had a one year of service requirement for the lower paid classes for the 401k and a 3 month entry wait for the management staff. But executive staff could enter immediately for health, and they wanted that for section 125 FSAs.
Can we do this? Sure can. It took some work with our attorneys and massaging the nondiscrimination testing. We accomplished this by passing the numerical averaging in section 125 concentrations test. But you say, “what about the benefits, eligibility and contributions test of 105?” Those passed too. There was enough of a spread of employees to satisfy the tests. We also clearly laid out the logic for rationale in documentation to show that we are not targeting the HCEs and Key employees, but that there were good business reasons to class employees the way we did which was because of turnover.
This is how flexible section 125 is juxtaposed against the comparable rules of HSA. What are the rules of section 125 nondiscrimination testing? The people you buy your service from will have those for you.
Please note this is copyrighted by eflexgroup.com. You may use this in the future if you give credit where credit is due.
1. All About HSAs_072808.pdf page 22
2. All About HSAs_072808.pdf page 20
3. All About HSAs_072808.pdf page 23