HSA Employer Contributions and Comparability: Testing and the 35% Excise Tax

If you contribute to any employee’s Health Savings Account outside a cafeteria plan, HSA employer contribution comparability rules under Internal Revenue Code Section 4980G require you to give every comparable employee either the same flat dollar amount or the same percentage of the HDHP deductible. Miss that standard, and the excise tax is 35% of everything you contributed across the whole workforce for the year, not just the shortfall.¹

What “Comparable” Actually Means

Section 4980G borrows its framework from the Archer MSA rules in Section 4980E. Comparable contributions are either the same dollar amount or the same percentage of the HDHP annual deductible, applied uniformly across a category of employees.² Pick one method for a category and stay with it for the calendar year.

Give $1,200 to one full-time employee with self-only coverage, and every full-time employee with self-only coverage gets $1,200. Choose the percentage route instead — say 40% of a $3,000 deductible — and every person in that category gets 40% of their deductible.

Watch the catch-up-eligible group. Employees age 55 and older have an extra $1,000 of room under Section 223, so a flat contribution that works fine for younger employees doesn’t automatically create a problem, but any decision to add money for older employees has to be handled uniformly within its own testing group.³

The Categories You Test Separately

You don’t have to fund every employee at the same level across the whole company. The regulations split the workforce into groups, and comparability is tested inside each group, not across them.⁴ The primary categories are:

Current full-time employees
Current part-time employees (customarily fewer than 30 hours per week)
Former employees, excluding those on COBRA

Each of those is then split by self-only versus family HDHP coverage. That gives you up to six testing buckets. Contributing $2,000 to full-time family-coverage employees and $1,000 to part-time self-only employees is fine, because those buckets stand alone.

Who Falls Outside the Test

Two groups don’t count for comparability at all. Former employees continuing coverage under COBRA are excluded, so you’re not required to match their HSAs when you fund current employees’.⁴

Employees covered by a collective bargaining agreement are also outside the calculation, provided health benefits were a subject of good-faith bargaining.⁵ If you run a mixed union and non-union workforce, the union group simply drops out of the analysis.

Mid-Year Hires and Part-Year Employees

New hires are where comparability trips employers most often. The regulations give you two ways to handle them: a pay-as-you-go method and a look-back method.⁶

Under pay-as-you-go, you contribute on set dates during the year, and everyone eligible as of the first of the month gets the same amount at the same time. Under look-back, you wait until year-end, identify everyone eligible for any month, and contribute based on the months each person was actually eligible.

A pro-rata contribution based on months of eligibility satisfies the rule for a mid-year hire; you don’t owe the full annual amount. But if you decide to accelerate the full amount for one new hire — a valued recruit, say — that same treatment has to extend to every comparable employee who started after January 1.⁶ One favor to one person becomes a company-wide obligation.

If a comparable employee hasn’t opened an HSA yet, you can wait. The contribution must be made by April 15 of the following year, with reasonable interest for the delay.⁶

The Cafeteria Plan Alternative

Routing HSA contributions through a Section 125 cafeteria plan takes them out of comparability testing entirely. They fall instead under the Section 125 nondiscrimination rules, which look at eligibility, benefits concentration, and whether the plan disproportionately favors key employees.⁷

That opens up designs comparability forbids. You can match employee salary deferrals — 50 cents on the dollar, for instance — which is impossible under the flat-amount or flat-percentage requirement of Section 4980G. You can also tie extra contributions to wellness program participation, like completing a health risk assessment. Under a cafeteria plan, the Section 125 rules govern instead of comparability.⁸

The Section 125 testing focuses on whether highly compensated employees (those earning more than $160,000 in the preceding year for 2026 testing) and key employees receive a disproportionate share.⁹

The cost is administrative. A cafeteria plan requires formal plan documents, annual nondiscrimination testing, and updates as thresholds move. If you vary contributions by years of service or age, you need to confirm the plan passes each year. Without a written plan document, you can’t claim the cafeteria plan exemption from comparability at all — and many employers discover too late that they opted into comparability testing simply by cutting checks directly to the custodian instead of running contributions through the cafeteria plan.

Fixing Errors Before They Become Penalties

When a contribution goes to someone who was never HSA-eligible, you can ask the custodian to return the funds along with any earnings, minus administration fees. If the money isn’t recovered by year-end, the full contribution has to be reported as gross income and wages on the employee’s W-2.¹⁰

The same recovery path applies when a contribution pushes an employee above the annual statutory cap. The important limit: if the amount stays within the annual limit, you cannot pull it back, even if the amount wasn’t what you intended. Only contributions that actually breach the statutory ceiling are recoverable on this basis.¹⁰

For clean administrative errors — a duplicate payroll file, a name mix-up, a decimal in the wrong place, an amount exceeding an employee’s own salary reduction election — the IRS has recognized that documented process errors can be reversed with the custodian. Correcting by December 31 of the contribution year is the target. Returned amounts under these circumstances are generally not reported on Forms 5498-SA or 1099-SA.

The 35% Excise Tax and How It’s Reported

The penalty is severe on purpose. If you fail comparability, the excise tax is 35% of the aggregate amount contributed to all employee HSAs for the period, not 35% of the shortfall.¹ Contribute $500,000 across 200 employees during the year, short one employee by $100, and the tax is $175,000. The design pushes employers toward careful administration.

You self-report failures on IRS Form 8928, calculating the tax and remitting payment.¹¹ Skipping the report doesn’t bury the problem; it adds interest and potential additional penalties if the IRS finds it later.

A waiver exists. The IRS may waive part or all of the excise tax if the failure was due to reasonable cause and not willful neglect, and the tax would be excessive relative to the failure.¹² You still file Form 8928 and argue the case. The waiver is a safety valve, not a plan.

1
Office of the Law Revision Counsel. 26 USC 4980G – Failure of Employer to Make Comparable Health Savings Account Contributions
2
Office of the Law Revision Counsel. 26 USC 4980E – Failure of Employer to Make Comparable Archer MSA Contributions
3
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
4
Department of the Treasury. Treasury Decision 9457 – Health Savings Account Comparability Rules
5
GovInfo. 26 CFR 54.4980G-3 – Employee Categories for Comparability Testing
6
eCFR. 26 CFR 54.4980G-4 – Calculating Comparable Contributions
7
eCFR. 26 CFR 54.4980G-5 – HSA Comparability Rules and Cafeteria Plans and Waiver of Excise Tax
8
eCFR. 26 CFR 54.4980G-5 – HSA Comparability Rules and Cafeteria Plans and Waiver of Excise Tax
9
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
10
Internal Revenue Service. Notice 2008-59
11
Internal Revenue Service. About Form 8928 – Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code
12
Internal Revenue Service. Instructions for Form 8928