As an employer offering a Health Savings Account (HSA) to your employees, the IRS requires that you establish a Premium Only Plan (POP) and complete non-discrimination testing on an annual basis.
The Premium Only Plan (Section 125):
A POP, also referred to as a Section 125 Plan, is the legal mechanism that allows you to facilitate pre-tax HSA contributions and cover health insurance premiums with pre-tax dollars.
It is important to note that while a POP is required to administer pre-tax HSA contributions, you are not strictly required to offer group health insurance. Even if employees purchase their own insurance with taxed pay, they can still receive pre-tax HSA contributions via payroll deductions, provided they have an HSA-qualified health plan and you have a POP in place.
The primary goal of non-discrimination testing is to ensure that your benefit plan does not unfairly favor highly compensated individuals. The IRS mandates this annual review to verify that contributions and benefits are distributed equitably.
If you fail to comply with IRS regulations and testing procedures, there are tax implications for your top earners:
Highly compensated individuals: They will lose the favorable tax treatment for their benefits. Unless corrections are made during the plan year, these individuals will have imputed income equal to the tax benefit amount they could have elected to receive, regardless of their actual elections.
Non-highly compensated individuals: They will generally not be affected by a failed test and retain their tax benefits.
Source: IRC 125, 26 U.S. Code 125. Cafeteria Plans
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