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ComplianceTax & AccountingApril 05, 2021

Health Savings Accounts: Correcting mistaken employer contributions

Overview

If you work with Health Savings Accounts (HSAs) at your financial organization, chances are you've encountered a case or two where an ineligible contribution was made. The method by which an ineligible HSA contribution is corrected is determined by the source of the contribution (i.e., made by the HSA owner versus made by the HSA owner's employer).

Ineligible employer contributions

The relevant Q&As in Internal Revenue Service (IRS) Notice 2008-59 indicate that an employer may ask for the return of an HSA contribution made on behalf of an employee who was never an eligible individual or the amount exceeds an eligible individual's statutory limit. Because Notice 2008-59 only addresses a couple of examples, the IRS released in 2018 Information Letter 2018-0033 which provides additional examples of when an employer may request the return of HSA contributions. This Information Letter states that when there is clear documentation demonstrating there was an administrative or process error, an employer may request the HSA custodian/trustee return the contribution amount(s) to the employer with any correction putting the parties in the same position that they would have been in had the error not occurred. We assume, as described in Notice 2008-59, the returned contributions would include earnings reduced by fees paid from the HSA.

Per Information Letter 2018-0033, the following are additional examples of when an employer may request an HSA custodian/trustee return amounts that were contributed in error to an HSA:

  • 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

Unanswered questions

What is left unstated is the type of documentation an HSA custodian/trustee should collect before returning any contributions to an employer, or whether it is necessary to comply with the employer's request since it the responsibility of an HSA custodian/trustee to protect HSA assets on behalf of an HSA owner. In addition to the list of reasons above, what other reasons, if any, provided by an employer will an HSA custodian/trustee accept given the fact that the IRS stated these are "some examples of the errors which may be corrected". Finally, contribution amounts made in error and the return of such contribution amount(s) to an employer are generally not reportable on IRS Forms 5498-SA or 1099-SA. Furthermore, following the methodology of Notice 2008-59 Q&A's we have to assume that the return of these mistaken contributions should be completed by December 31 of the year the contribution was made, otherwise the employer would likely need to increase the individual's gross income and wage amount on Form W-2.

Conclusion

The IRS indicates in Information Letter 2018-0033 that it is for informational purposes only, reflecting certain principles of the law. An HSA custodian/trustee will best serve employers by suggesting they confirm the eligibility status and contribution amount for each employee before making the deposits.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.

Randy Heidmann
Senior Specialized Consultant, Tax Advantaged Accounts, Compliance Center of Excellence
With more than 40 years of industry experience, Randy Heidmann has helped hundreds of financial organizations create, implement and maintain their tax-advantaged accounts programs.