According to a survey by Towers Watson, the recent health care reform act has encouraged strong growth in use of account-based health plans (ABHPs).
This trend is expected to continue. By 2015, 80 percent of employers will offer an AHBP, up from an estimated 61 percent in 2013. As enrollment in AHBPs increases, significant issues are arising around enrollment and contributions, which can result in compliance violations that can cost you administrative headaches and hard dollars in the form of IRS penalties.
Despite their best intentions, many organizations don’t have processes in place to ensure that they are compliant with the IRS’s HSA rules. Others are not even aware of the compliance risks and find themselves in violation, which creates risks for both the company and their employees.
Industry experts have uncovered the four main health savings account (HSA) compliance violations: employee failure or delay in establishing HSAs; employee eligibility violations; employer over-contributions to ineligible or terminated accounts; and a lack of processes to govern HSA contributions.
When you are advising employers about their benefit plans, you should warn them about the need to understand these compliance issues and avoid administrative nightmares.
Employees’ failure or delay in establishing HSAs
Currently, approximately 45 percent of HSA-eligible employees do not open HSA accounts.
Employees cite a negative perception of HSAs due to roadblocks such as the plan design, limited employer contributions, confusing enrollment processes and even a lack of education on the benefits of an HSA. Sometimes, employers simply do not recommend, sponsor or connect their payroll system to the services of an HSA administrator.
When your employees fail to open accounts, they incur early health care expenses that cannot be paid tax-free. As an employer, you also miss out on potential FICA tax savings on the HSA contributions.
For your employees who do open accounts, compliance issues can arise when you begin to deduct contributions from their paychecks and transfer those funds to an HSA custodian when the account doesn’t exist or hasn’t been established.
These funds usually end up in a company or bank-owned account pending resolution, sometimes for months, or paid out to the employee causing your accounting records to be inaccurate. Further, you’ll need to invest time and resources to untangle the mess.
Since contributions cannot be made tax-free until the account is established, you’ll have to revise payroll tax reporting to remediate the discrepancy. Also, if you withhold funds without promptly contributing to an HSA, you could be violating the “prohibited transaction” rule, subjecting you to additional interest penalties under the Employee Retirement Income Security Act (ERISA).
As an employer, you’ll not only need to understand HSA eligibility requirements, but you’ll also need to monitor your employees’ eligibility in order to avoid compliance issues. These issues can result from the confusion of offering multiple benefits options, a lack of employee education regarding qualifications to establish and contribute to the HSA or the absence of additional screening processes to ensure eligibility at enrollment.
Many eligibility challenges arise from life events such as marriage, divorce, new employment, termination of employment, having a child, etc., or usage of government benefits, such as Medicare, Tricare, or Veteran’s Affairs coverage. In practice, your employee should disclose these events to you so you can monitor their qualification for HSA contributions.
Contribution limits and status changes
If you fail to remove a terminated or ineligible employee from the HSA contribution rolls, you run the risk of over-contribution to their accounts.
Recovering the over-contribution from an HSA custodian can be difficult and time-consuming as it requires obtaining the permission of the terminated employee to recover the funds or even requiring the ex-employee to write a check directly to you.
While in most cases this leads to a loss of funds, you are still required to claim the contribution as taxable income and pay penalties on the funds.
Lack of processes to govern HSA contributions
The IRS mandates that HSA contributions must be voluntary and for employers to allow their HSA eligible employees to change their contributions at least monthly.
When an HR department fails to provide a method for employees to make these changes, it cannot only cause and administrative burden for the department, but can result in non-compliance with an employer’s Section 125/Cafeteria Plan as well. Also, limiting your employees’ ability to change their contributions when the need arises can discourage them from even opening an account.
So, how do you address the costly HSA compliance and administration issues? Typically, this expertise does not live in-house, so most companies team with industry experts to implement automated functions to ensure that they are compliant with government policy. Some of the important processes and controls that a technology partner can help you implement include:
- Automated ongoing eligibility monitoring based on census data.
- Assurance that money can only be moved to a financial institution holding a properly opened HSA account registered to the actual employee’s Social Security number.
- Functionality and questions to determine the true contribution limit for each employee, beyond basing it on age and insurance type.
- Automatic capping of contributions to their individual contribution limit at an individual employee level.
- Ability to track and distinguish between multiple employee categories.
- Starting employee education regarding HSAs well before the annual benefits enrollment period.
- Providing employees with regular reminders of barriers to HSA contribution eligibility.
- Requiring employees to confirm that they meet all of the HSA eligibility criteria before opening an account.
- Requesting that employees confirm their contribution limit based on personal circumstances on an annual basis.
- Ensuring that the latest census of HSA-eligible employees only receive HSA contributions made through payroll.