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CCH® BENEFITS — 7/21/08

HSA Excise Tax Rules Proposed

From Spencer's Benefits Reports: The Internal Revenue Service has issued proposed regulations for employer comparable contributions to health savings accounts (HSAs) under the excise tax rules of IRC Sec. 4980. These proposed rules would implement provisions of the Tax Relief and Health Care Act of 2006 (P.L. 109-432). The proposed rules appeared in the July 16 Federal Register.

The regulations would apply to employer contributions made on or after the first day of the first calendar year after final regulations are published. However, the proposed rules note that taxpayers may rely on the proposed rules for employer contributions made on or after Jan. 1, 2007, and before the effective date of final regulations.

The proposed regulations would do the following:

Nonhighly Compensated Employees

Proposed Reg. Sec. 54.4980G-4 provides that employer contributions to the HSAs of nonhighly compensated employees may be larger than employer contributions to the HSAs of highly compensated employees with comparable coverage. Conversely, employer contributions to the HSAs of highly compensated employees may not exceed employer contributions to the HSAs of nonhighly compensated employees with comparable coverage.

HSAs Started Midyear

Sec. 305 of the 2006 law provides that individuals who are eligible individuals during the last month of the taxable year (that is, who, in the case of calendar-year taxpayers, are eligible individuals on December 1 of the year) may make or have made on their behalf the maximum annual HSA contribution based on their high-deductible health plan (HDHP) coverage (self-only or family) on that date. A portion of the contribution is includible in income and subject to an additional 10% tax if the individual fails to remain an eligible individual for 12 months after the last month of the taxable year.

Proposed Reg. Sec 54.4980G-6 provides that the employer can contribute up to the maximum contribution on behalf of all employees who are eligible individuals during the last month of the taxable year, including employees who become eligible individuals after January 1 of the calendar year and eligible individuals who are hired after January 1 of the calendar year (referred to as “mid-year eligible individuals”).

An employer that makes the maximum calendar year HSA contribution, or that contributes more than a pro-rata amount, on behalf of employees who are midyear eligible individuals will not fail to satisfy the comparability rules merely because some employees will have received more contributions on a monthly basis than employees who worked the entire calendar year.

Employers are not required to make these greater than pro-rata contributions and may instead prorate contributions based on the number of months that an individual was both employed by the employer and an eligible individual.

Qualified HSA Distributions

Proposed Reg. Sec. 54.4980G-7 provides that if an employer offers qualified HSA distributions to any employee who is an eligible individual covered under any HDHP, the employer must offer qualified HSA distributions to all employees who are eligible individuals covered under any HDHP.

However, an employer that offers qualified HSA distributions only to employees who are eligible individuals covered under the employer’s HDHP is not required to offer qualified HSA distributions to employees who are eligible individuals but are not covered under the employer’s HDHP.

Filing The Excise Tax

The proposed regulations provide that persons who are liable for the excise tax under Secs. 4980B, 4980D, 4980E, or 4980G are required to file a return on Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code. The excise tax under Sec. 4980B, 4980D, 4980E or 4980G must be paid at the time prescribed for filing of the excise tax return (without extensions).

With respect to the excise tax under Sec. 4980B or 4980D for employers and third parties such as insurers or third party administrators, the return is due on or before the due date for filing the person’s federal income tax return. An extension to file the person’s income tax return does not extend the date for filing Form 8928.

With respect to the excise tax under Sec. 4980B or 4980D for multiemployer or specified multiple-employer health care plans, the return is due on or before the last day of the seventh month after the end of the plan year.

Finally, with respect to the excise tax under Sec. 4980E or 4980G for noncomparable contributions, the return is due on or before the 15th day of the fourth month following the calendar year in which the noncomparable contributions were made.

Hearing Scheduled

A public hearing has been scheduled for October 30, beginning at 10 a.m. in Room 2116 of the IRS Building, 1111 Constitution Avenue, N.W., Washington, D.C. Written comments (a signed original and eight copies) or electronic comments that are submitted timely to the IRS should be sent to: CC:PA:LPD:PR (REG-120476-07), IRS, Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Electronic comments may be submitted via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-120476-07).

For more information concerning the proposed regulations as they relate to Sec. 4980E or 4980G, contact Mireille Khoury at (202) 622-6080; concerning the proposed regulations as they relate to Sec. 4980B or 4980D, contact Russ Weinheimer at (202) 622-6080. For more information concerning the hearing and submission of comments, contact Richard Hurst at (202) 622-7180.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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