Can Your Employer Correct a Mistaken Contribution to Your HSA? Maybe . . .

Can Your Employer Correct a Mistaken Contribution to Your HSA? Maybe . . .

Sometimes employers can make a correction to mistaken contributions to your Health Savings Account. But not always.

Accidents happen, as commuters in Memphis can attest after a recent truck accident left an interstate highway covered in alfredo sauce. That maxim is equally true in the financial world, where occasional individual errors or systemic issues can transfer funds from one party to another by mistake. Sometimes the errors are easily fixed, sometimes the solution is complicated, and other times the mistake can't be reversed.

What about employer contributions to worker's Health Savings Accounts? Prior to 2018, there were very limited circumstances in which companies could recover funds deposited in error. Then, four years ago, the Internal Revenue Service described additional situations in which honest mistakes could be reversed.

Let's look at the current situation by examining an IRS Notice and a Private Letter Ruling.

You Were Never HSA-eligible

IRS Notice 2008-59 (Q&A 23) makes clear that your employer can recapture the company contribution to your Health Savings Account if you were never eligible to open and fund an account.

Example: You switch jobs at age 66. Your new company offers a Health Savings Account program. Unbeknownst to you, your enrollment in Medicare Part A when you turned age 65 - which your brother-in-law suggested you do to avoid "some sort of penalty" that he'd read about - is disqualifying coverage. You opened your Health Savings Account and both you and the company contributed for several months until you realized you weren't HSA-eligible. Because you were never eligible to open the account, and a Health Savings Account contribution can go into only a Health Savings Account, your company can request that its administrator return the employer contribution.

In this situation, you have a problem as well. You must withdraw your pre-tax payroll contributions and any earnings on those deposits (which in today's low-interest environment are minimal) before you file your tax return for that year. If you catch the error before the end of the calendar year, you should inform you employer so that it can recharacterize those contributions as taxable income on your Form W-2. Your returned contributions are included in your taxable income, and you face no penalty.

The Contribution Exceeded Your Statutory Ceiling

The other case cited in IRS Notice 2008-59 (Q&A 24) is an employer contribution that exceeds an employee's statutory maximum annual contribution. In that case, the company can request that the Health Savings Account administrator return a portion of the excess contribution.

Example: A company contributes $2,000 for self-0nly and $4,00 for family coverage to each eligible employee enrolled in an HSA-qualified plan with a $3,500/$7,000 deductible. The company incorrectly deposits $4,000 into the account of an employee with self-only coverage. The company can request that the administrator return not the full $2,000, but rather only the amount by which the employer contribution exceeds the statutory minimum annual deductible for that contract type (in this case, $3,650 for self-only coverage). Thus, the company can recover no more than $350 ($4,000 contribution less the $3,650 statutory maximum contribution).

In this case, the employee can't contribute through pre-tax payroll deductions or tax-deductible deposits to reduce her taxable income. But she can enjoy the same federal and state income tax savings by increasing her contribution to her tax-deferred workplace retirement account or by funding a Limited-Purpose Health FSA (if she is sure she will have qualified dental and vision expenses).

Administrative Errors

In 2018, the IRS issued a Private Letter Ruling outlining some specific errors that can be corrected. A Private Letter Ruling is a response to a question posed by an individual taxpayer. Private Letter Rulings don't apply beyond the taxpayer who posed the question. But they do signal how the IRS is thinking about a particular issue in the absence of specific guidance.

In the 2018 letter, the IRS listed some situations in which a company can request that the account provider claw back contributions if the employer can document that they were made due to administrative error. The examples cited:

  • 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.

This is an important development. It eliminates the Bank Error in Your Favor - Collect $200 card that emloyees could play prior to the letter. It ensures that employers aren't left financially responsible for an honest mistake - particularly one driven by today's technology.

Contributions Not Recoverable

There are still situations in which companies can't recover contributions. The most common situation is when the employer prefunds employees' accounts with an up-front lump-sum employer contribution, typically annually (but also any frequency less common than per pay period) and the worker doesn't remain enrolled to the end of the plan year.

Example: The company makes a lump-sum contribution of $1,000 to each employee at the beginning of the plan year. A participating worker leaves employment two months later. The company can't recapture any of the annual funding by deducting it from the employee's final paycheck or having the account provider claw it back.

The Bottom Line

The Private Letter Ruling clearly reflects some understanding on the part of the IRS to help employers who make honest mistakes or are victims of a technology snafu over which they had no control. This additional flexibility seems reasonable as it protects employers and doesn't disadvantage employees (except to the extent that they could capitalize on an honest mistake prior to this letter).

#HSAWednesdayWisdom #HSAMondayMythbuster #HSA #TaxPerfect #HealthSavingsAccount

Great reminder!

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William G. (Bill) Stuart

Nationally recognized expert on reimbursement account strategy and compliance, particularly Health Savings Accounts and ICHRAs 🔹Writer🔹Author🔹Speaker🔹Educator🔹Strategist

1y

Good to know.

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