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IRS Provides Examples of When an Employer Can Recover HSA Contributions

When The Internal Revenue Service (IRS) released Information Letter 2018-0033, employers were provided more clarification in regards to certain situations that would allow them to request the return of mistaken Health Savings Account (HSA) contributions originally identified in IRS Notice 2008-59.

Granted that an HSA balance is nonforfeitable, contributions made by mistake must be corrected by either stopping or adjusting any future contributions.

According to IRS Notice 2008-59, the IRS allowed employers to seek the return of previously made contributions in very limited situations such as the employer requesting the return of contributions on behalf of employees who were never HSA-eligible, or contributions made that exceeded the maximum annual contribution limit.

Given that the limited situations indicated in IRS Notice 2008-59 were not intended to be an exclusive list, the release of Information Letter 2018-0033 provides more guidance and clarity for employers to recover mistaken HSA contributions.

The letter also indicates that the appropriate conditions for an employer to request the return of HSA contributions is when they have clear documentary evidence demonstrating an administrative or process error.

The employer may ask the financial institution to return the proper amounts as long as the parties are put in the same position that they would have been had the error not occurred.

Types of errors that employers can request the return of mistaken HSA contributions for:

  • Contribution amount that was withheld and deposited in an employee’s HSA for a pay period that exceeded the amount shown on the employee’s HSA salary reduction election.
  • Employer contributions to employee that the employer did not intend to contribute, but was still contributed due to an incorrect spreadsheet.
  • Employer contributions to employee that the employer did not intend to contribute, but was still contributed due to similar names being confused with one another.
  • An incorrect amount that an employee receives as an HSA contribution due to it being incorrectly input by a payroll administrator (this could be in-house or third-party).
  • Employee HSA contributions received twice due to a duplication in payroll files being transmitted.
  • HSA contribution amount received by an employee because a change in employee payroll elections is not processed in a timely manner causing the amounts withheld and contributed to be greater than (or less than) the employee elected.
  • When an HSA contribution amount that the employee receives is calculated incorrectly, causing a disparity to the total amount for the year that is allocated by the system over an incorrect number of pay periods.
  • Errors made in a mathematical manner where an employee receives an incorrect HSA contribution because of a misplaced decimal point resulting in a contribution that was not originally intended

Review both documents, by clicking below:

Maintaining supportive documentation is imperative to ensure any HSA contributions made in error or by mistake can be recouped.

For more information about HSAs read Health Savings Accounts - Frequently Asked Questions by Employers.