HSA compliance: Tell clients about the traps!

 Employee eligibility

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.