Do Employers Have Flexibility in Determining the Timing of Contributions to Workers' HSAs?

This column is an excerpt (Question 152) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and a citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: I want to give my employees a company contribution. Do I have the flexibility to determine the timing?

?Answer: Yes. You’re not tied to a specific schedule, so you don’t have to make a lump-sum contribution or level contributions throughout the year. You decide before the beginning of the plan year when and how much to contribute. You write this amount and funding schedule into your Cafeteria Plan (also called a Section 125 Plan to reflect the relevant section of the Internal Revenue Code) document, which outlines the rules of your contributions to participating employees’ Health Savings Account.

You and your employees may have conflicting goals for the timing of employer contributions. Health Savings Account owners prefer an up-front lump-sum company contribution so that they have a balance that they can tap immediately to purchase a prescription or enjoy a prompt-pay discount when they incur a qualified expense early in the year. Some workers realize that if they leave employment during the year, they can keep the entire employer contribution because the company’s contributions vest immediately except in a handful of situations (see Question 153, Question 154, and Question 177).

In contrast, your company may not have sufficient cash flow to fund every employee’s account up-front. Although you may want to provide employees with some money right away to help them manage immediate qualified expenses, you may view contributions as you do other compensation – something to be earned pay-period-by-pay-period. This is especially true if you have a high-turnover work force or expect a reduction-in-force during the plan year because employer contributions vest immediately and departing participants take your funding with them.

?Tips

?Some employers choose a semiannual or quarterly contribution schedule to balance the company’s and employees’ preferences. This approach provides some up-front funding to employees to prevent the scenario in which a worker leaves employment with more than the equivalent of a prorated employer contribution.

• Another way of meeting the needs of both the company and employees is to give a portion of the contribution as an up-front lump-sum contribution and the remainder per month or per pay period. You could allocate a $1,000 contribution by depositing $400 into each employee’s account at the beginning of the year and contributing $50 each month. Participating workers receive some funds up-front to meet immediate needs but must remain an active employee and HSA-eligible to receive the balance.
• Be sure to manage the timing of contributions to match the work schedule. For example, many school districts start their fiscal (and thus their benefit-plan) year July 1. Teachers typically change jobs [SW(1]?during the summer. If you make the entire contribution up-front, you risk giving away money (a form of compensation) to employees who don’t remain on the payroll to earn that compensation. In this case, you may want to divide a $1,000 contribution as follows: $100 in July, $100 in August, $400 in September, and $400 in January (or, more generously, $100, $100, and the remaining $800 in September, at which point few teachers leave employment that school year). That way, you minimize your contributions to employees who leave before the beginning of the school year.

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