The IRS recently released an information letter clarifying that employers can recover contributions erroneously made to an employee’s Health Savings Account (HSA).
Prior to this letter being issued, the guidance contained in IRS Notice 2008-59 outlined only two scenarios in which employers could recoup HSA contributions:
- If an employee was never eligible for HSA contributions to begin with
- If an employer erroneously contributed amounts exceeding the maximum annual contribution to an employee’s HSA
Notice 2008-59 also stated that “employers generally cannot recoup amounts from an HSA other than [the above two scenarios].” This statement led many to believe employers could not recoup funds contributed due to any other error.
According to the new IRS information letter, Notice 2008-59 was not intended to provide an exhaustive list of when HSA contributions may be returned to an employer. Rather, if an employer has clear documentary evidence showing an administrative or process error, the 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 new IRS information letter also includes some examples of the type of errors which may be corrected:
- An amount withheld and deposited in an employee’s HSA for a pay period that is greater than the amount shown on the employee’s HSA salary reduction election
- An amount that an employee receives as an employer contribution that the employer did not intend to contribute but was transmitted because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other
- An amount that an employee receives as an HSA contribution because it is incorrectly entered by a payroll administrator (whether in-house or third-party) causing the incorrect amount to be withheld and contributed
- An amount that an employee receives as a second HSA contribution because duplicate payroll files are transmitted
- An amount that an employee receives as an HSA contribution because a change in employee payroll elections is not processed timely so that amounts withheld and contributed are greater than (or less than) the employee elected
- An amount that an employee receives because an HSA contribution amount is calculated incorrectly, such as a case in which an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods
- An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended
Employers that recover erroneous HSA contributions should maintain documentation to support their position that an administrative or process error occurred.
The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.