By: HUB’s EB Compliance Team

The IRS recently released an information letter from 2015 that appeared to give some breathing room for correcting mistaken health savings account (“HSA") contributions. While the letter appears helpful at first glance, employers should proceed with a bit of caution.

Mistakes Happen

Back in 2009, the IRS issued some very limited guidance on mistaken HSA contributions (as part of a larger IRS Notice on HSAs). The Notice basically said that employers could ask the HSA trustee or custodian to return employer money if:

  • It was contributed to an HSA on behalf of someone was not eligible to contribute to an HSA at any point during that year; or
  • The employer contributions exceeded the maximum allowed HSA contribution for that employee for that year.

Other than those two situations, the Notice said, “[e]mployers generally cannot recoup amounts from an HSA….” For years, it was an open question what (if any) other situations were eligible to correct.

The Info Letter

The IRS information letter says that the original IRS Notice was never intended to be an exclusive list. As a result, the IRS gives some examples of situations where correction may be appropriate, such as:

  • The amount withheld and deposited in an employee’s HSA for a pay period is greater than the amount shown on the employee’s election. (HUB Note: If the employee elected an annual amount, it would seem the employer would need to wait until the end of the year to recoup the money.)
  • The employer makes an unintentional employer contribution because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.
  • The HSA contribution is incorrectly entered by a payroll administrator (whether in-house or third-party).
  • The employee receives as a duplicate HSA contribution because duplicate payroll files are transmitted.
  • 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. (HUB Note: It’s not clear why an employer would need to ask for money back if the amounts were less than the employee’s election. It seems the employer could just make up the difference in future payroll contributions.)
  • The HSA contribution amount is calculated incorrectly, such where an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods. (HUB Note: Presumably, this could happen where the payroll system divides an annual election by, for example, 24 payroll periods when the employee actually has 26.)
  • An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended. (HUB Note: This one is probably easiest to explain. “No, I did not intend to make a $10,000.0 contribution to that employee’s HSA.”)

But be careful…

While this is all good news, there are some limitations employers should keep in mind:

  1. This isn’t official guidance While it is issued by the IRS, it is not binding on them. In other words, an individual IRS agent is not required to follow it on audit. It also means the IRS can change its mind at any time. That said, these are fairly clear cut mistakes, so the ability to correct them seems reasonable. Even so, however, employers should tread carefully.
  2. You can only ask. Because HSAs are employees’ individual accounts and not plans maintained by the employer, all the employer can do is ask for the money back. If the HSA trustee or custodian does not want to follow this guidance (because, for example, it isn’t binding – see #1), the employer cannot force the trustee or custodian to return the money.
  3. You have to prove it.The letter itself states that employers need to keep “clear documentary evidence” showing that the contribution was in error. Merely your word will not be enough. The letter emphasizes the importance of maintaining records.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.