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Employers' Ability to Recover Mistaken HSA Contributions

 March 18 2019     Diane Cross

Generally, contributions to an HSA are nonforfeitable (meaning contributions cannot be recouped once made).  But unfortunately, even with the best efforts, mistakes happen when administering HSA contributions.  To that end, IRS Notice 2008-59 provided welcomed guidance for employers and explained circumstances where an employer can recoup contributions made to an employee’s HSA, including errors where (1) an employee was never HSA-eligible, and (2) contribution amounts that exceed the maximum limit. 

Recently, the IRS has released Information Letter 2019-0033 reiterating that Notice 2008-59 was not meant to provide an exhaustive list of circumstances where an employer could recoup HSA contributions.  Per the Letter: 

“If there is clear documentary evidence demonstrating that there was an administrative or process error, an employer may request that the financial institution return the amounts to the employer, with any correction putting the parties in the same position that they would have been in had the error not occurred.”

The Letter further provides examples of administrative or process errors that may be corrected, such as: 

  • An amount deposited in an employee’s HSA that is greater than the amount shown on the employee’s HSA salary reduction election.
  • An amount transmitted because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.
  • An employee receives an incorrect HSA contribution because it is incorrectly entered by a payroll administrator.
  • An employee receives a second HSA contribution because duplicate payroll files are transmitted
  • An employee receives as an incorrect HSA contribution because a change in employee payroll elections is not processed timely.
  • An employee receives an incorrect HSA contribution because an HSA contribution amount is calculated incorrectly.
  • An employee receives an incorrect HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended.

The Letter explains that the above list is not exhaustive, and the content shared is intended for informational purposes only.  Employers should be mindful that the above errors require clear documentary evidence to correct.  As such, employers should maintain any supporting documentation when seeking to recover erroneous HSA contributions.  Also, it is important to remember that if an individual exceeds his or her maximum contribution limit, the error must be correct by the individual’s deadline to file federal income tax return (i.e. April 15th following the taxable year).  Otherwise, the individual may be subject to a 6% excise tax and the excess contribution amounts will be included in the individual’s gross income for the taxable year the excess contribution was made. 

For additional questions regarding HSA contributions, please contact your HORAN representative.