IRS' final regulations on HSAs OK health assessment incentives
Final Internal Revenue Service regulations open the door for employers with health savings accounts that are part of flexible benefit plans to give employees financial incentives to participate in health assessment and disease management programs.
Benefit experts had feared that the IRS closed the door last year to such incentives-which a growing number of employers believe are a vital first step to helping employees improve their health-when it proposed HSA ``comparability'' rules. Those rules cleared up various uncertainties, including whether employers can advance-fund HSA contributions and how employers can, if they so desire, continue to contribute to an employee's HSA after the individual leaves the company (BI, Sept. 12, 2005).
But the proposed regulations also created a big uncertainty in saying that conditioning employer HSA contributions on participation in health promotion programs would not pass muster.
However, the regulations did propose-with a new restriction-that employers that make HSA contributions as part of a flexible benefit plan could condition an HSA contribution on employee participation in health promotion programs.
In fact, another part of the proposed regulation-giving an example of an HSA contribution through a flexible benefit plan-suggested that practice be allowed but only if the employer also gave the employee the option of receiving cash or other nontaxable benefits in lieu of the HSA contribution. Such ``cash-out'' designs are very unusual.
But the final regulations eliminate any uncertainty on what restrictions employers whose HSAs are part of flexible benefit plans face in encouraging employees, through financial incentives, to participate in health promotion programs.
Simply put, the IRS said in the final regulations that the comparability rules do not apply to employers' HSA contributions if those contributions are made through flexible benefit plans.
That exemption affects virtually all large employers that offer HSAs as, almost without exception, HSAs are incorporated in flexible benefit plans. In such an arrangement, employees make pretax contributions to HSAs through salary reduction. By contrast, when an individual who is not enrolled in a group health care plan contributes to an HSA, he or she does so on an aftertax basis, with the individual then taking a tax deduction for the contribution.
Benefit experts say the final regulations, in one fell swoop, eliminate the uncertainty on how employers' HSA contributions could be linked to employee participation in health programs.
``We now have definitive guidance. The IRS has eliminated any misconceptions,'' said Sharon Cohen, an attorney with Watson Wyatt Worldwide in Arlington, Va.
``As long as employees have an opportunity to make pretax contributions to an HSA, an employer has great latitude with design opportunities,'' said Andy Anderson, of counsel with the law firm Morgan, Lewis & Bockius L.L.P. in Chicago.
The IRS, notes J.D. Piro, an attorney with Hewitt Associates Inc. in Norwalk, Conn., has made pretty clear that ``most plan designs will be OK.''
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