Health savings accounts (HSAs), created in late 2003 by the Medicare Prescription Drug and Modernization Act, offer individuals who are covered by a high-deductible health plan (HDHP) a tax-favored way to save for and pay for medical expenses. Through contributions to an HSA and the interest the account earns, the participating individual builds a nest egg for future out-of-pocket health care expenses.

When offered in the workplace as part of an employer's health care benefits, both employees and the employer can make contributions to the HSA. Employers are not required to make contributions and, according to the Kaiser Family Foundation's Employer Health Benefits 2005 Annual Survey, one in three employers offering an HSA/HDHP made no contribution to their employees' HSA for either single or family coverage.

Employers that do contribute to an HSA-perhaps, for example, to make the HSA/HDHP plan option more attractive to employees-must make comparable contributions for all participating employees. In other words, an employer generally cannot vary the amount of the HSA contribution for different employee groups. Failure to follow this requirement results in an excise tax assessment against the employer of 35% of all HSA contributions it makes for the year.

Recent Internal Revenue Service (IRS) guidance clarifies this comparable contribution requirement. The guidance, issued in the form of proposed regulations, can be relied upon by employers pending its finalization.

Contributions that are equal in amount or that are based on the same percentage of the HDHP deductible for employees with the same category of HDHP coverage are considered to be comparable. Since there are two categories of HDHP coverage (self-only and family), this means that-except for three employee categories spelled out by the regulations-an employer must make a comparable contribution for all employees in the same HDHP coverage category. The three employee categories for which an employer may vary its HSA contributions are full-time status, part-time status and former-employee status. So, for example, employer HSA contributions could be made to all full-time employees who have the same category of HDHP coverage, but not to part-time employees in the same coverage category.

Since the comparability requirement focuses on the HDHP coverage category, an employer could, for example, contribute 25% of the HDHP deductible as its HSA contribution. Because the deductible will be different for the self-only and family HDHP coverage categories, the employer contribution to employees in the two coverage groups would be different, but this is permissible. The employer also could make an HSA contribution to employees in one coverage category but not to those in the other; e.g., make an HSA contribution for employees with self-only coverage, but not for those with family coverage.

Beyond this, the IRS guidance gives an employer little room to vary its HSA contribution for different groups of employees. For example, contributions cannot differ based on union versus nonunion status, or based on management versus nonmanagement status. Contributions cannot be based on participation in wellness, disease management or health risk assessment programs; on age or years of service; or on eligibility for catch-up contributions. Contributions based on a matching formula are not considered comparable.

However, an employer can make an HSA contribution for employees who participate in the employer's own HDHP, but not for employees who participate in a different HDHP, such as that under a spouse's plan. Also, the comparability requirement does not apply to contributions made through a cafeteria plan.

Employers that decide to make HSA contributions have three options on the timing of the contributions: pay-as-you-go, on a pre-funded basis, or on a look-back basis by April 15 of the following year. All HSA contributions must be made on the same timing basis.

As noted above, the penalty for failing to make comparable HSA contributions is a 35% excise tax on the total amount of employer HSA contributions for the year. The IRS guidance does provide that all or a part of this penalty could be waived, if the failure to make comparable contributions stemmed from reasonable cause and not from willful neglect.

An employer's decision to make or not make an HSA contribution is a matter of strategic planning and cost considerations. However, if contributions are made, a review of these requirements with a benefits professional will help ensure that this investment is in compliance with the applicable rules.