1. Purpose.To advise states of an amendment to the definition of wages in Federal unemployment compensation (UC) law related to the treatment of employer payments made for a Health Savings Account.
2. Reference. The Internal Revenue Code (IRC), including Section 3306(b) of the Federal Unemployment Tax Act (FUTA); Public Law (P.L.) 108-173, the "Medicare Prescription Drug, Improvement, and Modernization Act of 2003," signed on December 8, 2003; Unemployment Insurance Program Letter No. 36-96; and Internal Revenue Service Publications 15 (commonly called Circular E) and 969.
3. Background. In 1996, Congress created "medical savings accounts," which are commonly called Archer MSAs and are discussed in detail in IRS Publication 969. In UIPL 36-96, states were notified that certain contributions made by employers to these accounts were exempt from wages for FUTA purposes. Specifically, an employers contributions to an Archer MSA are not wages, and, therefore, are not subject to FUTA taxes if it is reasonable to believe at the time of payment of the contributions that they will be excludable from the income of the employee.
However, the provisions relating to Archer MSAs contain a termination provision. As explained
in the Conference Report for the newly enacted P.L. 108-173, "After 2003, no new contributions can be made to Archer MSAs except by or on behalf of individuals who previously had Archer MSA contributions and employees who are employed by a participating employer." (H. Rep. 108-391, page 840.)
In response to this termination, P.L. 108-173 created a new type of savings account called a "Health Savings Account" (HSA).
4. Amendment to FUTA. For FUTA purposes, the treatment of employer contributions to HSAs mirrors that for Archer MSAs. Section 1201(d)(1)(B) of P.L. 108-173 added a new paragraph (18) to Section 3306(b), FUTA, concerning treatment of payments to an HSA made by an employer. Under this amendment, the term "wages" does not include -
any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(d).
Section 106(d), IRC, as created by P.L. 108-173, addresses employer contributions to an HSA. Among other things, it states that, in the case of an employee who is an eligible individual for HSA purposes, "amounts contributed by such employees employer to any [HSA] of such employee shall be treated as employer-provided coverage for medical expenses under an accident or health plan to the extent such amounts do not exceed the limitation” for an HSA with respect to a taxable year.
The amendments relating to HSAs "apply to taxable years beginning after December 31, 2003." (See Section 1201(k) of P.L. 108-173.) The authority for interpreting the HSA provisions rests with the IRS. Therefore, for more specific guidance, states will need to await the issuance of IRS instructions.
States should be aware that withdrawals from HSAs are limited to certain expenses. The HSA provisions prohibit withdrawals for the payment of health insurance premiums with certain exceptions. One of these exceptions is "any expense for coverage under . . . a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law." (See Section 223(d)(2)(C)(iii), IRC, as created by P.L. 108-173.) The Archer MSA law has contained an identical provision relating to withdrawals for insurance premiums and receipt of UC since its creation in 1996. (See Section 220(d)(2)(B)(ii)(III), IRC.)
| RESCISSIONS | EXPIRATION DATE |
| None | Continuing
|
5. Action Required. Administrators should provide this information to appropriate staff. Amendments to state law are not required for conformity purposes. Instead, it is the states option whether it amends its UC law to exclude eligible employer contributions to HSAs.
6. Inquiries. Direct questions to the appropriate Regional Office.