Different Contributions for New Hires? Yes, but Be Sure to . . .

Employers aren't required to give the same Health Savings Account contribution to employees who join the company mid-year as workers who were enrolled on the first day of the plan year.

Most (but not all) companies that sponsor an HSA-qualified medical plan offer eligible employees enrolled in that coverage a company contribution to their Health Savings Account. This contribution helps workers manage their out-of-pocket financial responsibility, including deductibles, coinsurance, and copays, which is generally higher than on other plans that the company sponsors.

Employers have great latitude in the amount and timing of these contributions. Typical timing includes an annual lump-sum contribution, periodic (quarterly, monthly, per-pay period) deposits, and matching contributions. These policies are outlined in the company's Cafeteria Plan (also called a Section 125 plan), the governing document that allows for pre-tax payroll deductions for medical premiums, Health FSAs, and Health Savings Accounts. The Health Savings Account section outlines the amount and timing of employer contributions.

But what's the company's policy toward new hires who become HSA-eligible mdi-year? Is the company required to give them the same contribution during the year as it does those workers who are enrolled all 12 months?

No. But the company must spell out its policy clearly in the Cafeteria Plan so that all employees understand how employer funding works. And then the company must administer the plan according to the Cafeteria plan.

Let's look at several employer contribution strategies to determine how they may be adjusted to accommodate mid-year hires (definition: a new worker hired after the first day of the plan year).

Full Lump-Sum Contribution

Companies that offer a lump-sum contribution to workers who are enrolled and HSA-eligible on the first day of the plan year can offer that same amount to HSA-eligible new hires, regardless of when they join the plan.

Example 1: Tamara's is hired effective April 15 and becomes HSA-eligible May 1 (because eligibility is determined as of the first day of the month, she wasn't eligible to make or receive contributions during April). Her company gave each HSA-eligible employee a $1,000 contribution in the first January payroll. It deposits the same amount into her account in the first May payroll.

Example 2: Tamara's new company hires Juan in early December. He's not HSA-eligible in December and thus doesn't receive a company contribution for that year.

Companies that offer the full lump-sum to HSA-eligible new hires regardless of when they're hired and become eligible during the year do so because their insurers don't prorate the deductible and out-of-pocket maximum. These employers want to provide the same financial benefit to employees who face the same potential out-of-pocket responsibility. The first company for which I worked as an HSA-eligible employee adopted this approach.

Partial or No Lump-Sum Contribution

Companies that offer a lump-sum contribution aren't required to deposit the full amount in new eligible employees' accounts. Instead, the employer can prorate those contributions or not contribute at all.

Example 3: Cher's Chairs, a furniture store, deposits $1,200 into each eligible employee's Health Savings Account at the beginning of the plan year. It prorates contributions to new hires based on their eligibility as of the first day of a calendar quarter. Bobbie, who's hired Jan. 21 and becomes HSA-eligible Feb. 1, receives $900. Alberta, who joins the company after Labor Day and becomes HSA-eligible Oct. 1, receives $300.

Example 4: Hank's Pranks, purveyors of fine whoppee cushions and other practical gags, requires employees to be HSA-eligible on the first day of the year to receive the company's contribution. Mid-year hires receive no company contributions until the following plan year.

The rationale for the partial-year contribution is often two-fold. First, the contribution is part of total compensation, which is earned by working. An employee who joins mid-year hasn't worked as many hours as someone who's been on the payroll all year. Second, although new hires face the same out-of-pocket exposure, they're covered on the medical plan for less time, so mathematically they're less likely to incur the same financial responsibility as employees who are covered a longer period of time.

The rationale for not providing any contribution is difficult to understand. You snooze, you lose is the proper rejoinder in some situations, but it doesn't appear to fit her. Companies that offer a choice of medical plans may find that workers choose another plan or enroll in the HSA-qualified plan because of its low premium and feel early resentment toward their new employer.

Per Paycheck Contribution

Some companies, including the second for which I worked as an HSA-eligible employee, contribute a fixed amount per pay period. Their rationale is that the employer contribution, like salary, is earned pay-period-to-pay-period. Thus, the contributions are allotted per paycheck.

Example 5: Hakim's employer contributes $50 per semi-monthly payroll period. He joins the company mid-year and is HSA-eligible as of June 1. He receives total contributions of $700 that year. His colleagues who were employed and HSA-eligible all year receive $1,200.

This is a straight-forward approach that these companies apply to new hires. It's easy to justify and should create no hard feelings among new hires. The company simply allows employees who become HSA-eligible mid-year to join the program on the same terms as all other participants.

Matching Contributions

Some companies (but in my opinion, not enough) have adopted the approach of matching employee contributions, up to a certain annual maximum.

Example 6: Clete's Eats offers an HSA-qualified plan to its restaurant wait staff and kitchen crew. The company matches the first $50 of semi-monthly payroll contributions, which limits its total exposure to $1,200 annually and ensures that employees who claim the full employer contribution contribute at least $2,400 per year.

Matching contributions are a great way to encourage employees to contribute, which is why most companies structure their sponsored retirement plans using matching employer contributions. And these programs lend themselves well to new hires, as they join the plan on the same monthly terms as other workers for the remainder of the year.

It's More Than Mid-Year Hires

It's important to note that this idea of how to handle employees who become HSA-eligible mid-year extends beyond new hires. Some workers who are enrolled on an HSA-qualified plan may have a temporary disqualifying situation, such as a general Health FSA grace period or a spouse's general Health FSA plan. These workers, who are enrolled in the HSA-qualified plan all year, become HSA-eligible during the year. The company's policy toward their employer contributions must be clear, which is why the policy should be considered mid-year eligibility versus mid-year hire.

Example 7: Kent enrolls in his company's HSA-qualified plan effective Jan. 1. But he carries a balance in his general Health FSA into the grace period. He's not eligible to make or receive contributions to his Health Savings Account until April 1.

Example 8: Reginalda's husband participates in his company's general Health FSA with a plan year of July 1 through June 30. Her company offers a new HSA-qualified plan effective April 1. She can't open her Health Savings Account before July 1, so she can't accept a company contribution or fund an account with pre-tax payroll deductions before July 1.

The Bottom Line

Employers can determine how to treat workers who become HSA-eligible after the first day of their Health Savings Account contribution year. Some employer-contribution policies (for example, an annual lump-sum contribution on the first day of the plan year) require some thought around how to handle mid-year eligibility and the implications on the company's pocketbook and employees' satisfaction with the plan. Other policies (for example, contributions each pay period) often require no modification to accommodate employees who become HSA-eligible mid-year. Employers should design contribution programs to meet strategic objectives, then make sure that they create a policy to address workers who gain eligibility after the start of the plan year. And then they must be sure that their policies are clearly spelled out in the Cafeteria Plan and followed each time a worker becomes HSA-eligible.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.