QUESTION: Some of our employees would like to reduce their pre-tax HSA contribution elections under our cafeteria plan due to the COVID-19 health crisis. For example, one employee’s spouse was laid off and another employee’s spouse is working reduced hours as a result of the crisis. Under what circumstances can our employees make midyear changes to their HSA elections?
ANSWER: Under proposed IRS regulations (which may be relied upon until final regulations are issued), employees may prospectively start, stop, or otherwise change an election to make HSA contributions through pre-tax salary reductions under a cafeteria plan at any time during the plan year. Under these regulations, a cafeteria plan that offers pre-tax HSA contributions must allow participants to prospectively change their salary reduction elections for HSA contributions at least monthly. The plan must also allow participants who become ineligible to make HSA contributions to prospectively revoke their salary reduction elections for HSA contributions. Among other requirements, an individual must have coverage under a high-deductible health plan to be eligible to make HSA contributions.
Remember that other cafeteria plan election changes may be made only if they are permitted under IRS rules. Consequently, an employee who elects to reduce or discontinue HSA contributions during a plan year may be limited to receiving the difference as taxable compensation—additional nontaxable benefits cannot be elected unless the cafeteria plan election change rules otherwise allow a midyear change to the elections for those benefits. The IRS has provided some relief from these rules in response to the COVID-19 health crisis (see our Checkpoint article). However, plans must be amended to take advantage of the relief.
For more information, see EBIA’s Cafeteria Plans manual at Sections XIV.P (“Pre-Tax HSA Contribution Election Changes”) and XVI.K.6 (“What Cafeteria Plan Changes Are Required in Order to Offer HSAs?”). See also EBIA’s Consumer-Driven Health Care manual at Sections IX (“HSAs: Who Is Eligible?”) and XVIII.B (“HSAs Offered Through Cafeteria Plans”). You may also be interested in our webinar “Learning the Ropes: An Introduction to HRAs and HSAs” (recorded on 3/11/20).
Contributing Editors: EBIA Staff.