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).