ComplianceTax & AccountingFebruary 18, 2019

Health savings accounts: Correcting mistaken employer contributions further explained by IRS

Overview

On December 28, 2018 the Internal Revenue Service (IRS) released Information Letter 2018-0033 detailing additional specific situations (other than those described in IRS Notice 2008-59, Q&As 23 and 24) of when an employer has a right to ask a Health Savings Account (HSA) custodian/trustee for the return of its mistaken HSA contributions. Note that this Information Letter had previously been provided to specific parties in 2015.

The Q&As in 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 a contribution amount that exceeds an eligible individual’s statutory limit. Notice 2008-59 does not specifically address other situations in which contributions made to an employee’s HSA are the result of an employer’s or trustee’s administrative or process errors (i.e., mistakes), but as the IRS Information Letter describes the Notice also was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributions. Information Letter 2018-0033 confirms that when there is clear documentation demonstrating that 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 absence of the error. 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 regarding the contribution error an HSA custodian/trustee should collect prior to any return of contributions to an employer, or whether they have to comply with the employer’s request, since it the responsibility of an HSA custodian/trustee to protect an HSA owner’s HSA assets. Also, in addition to the list of error reasons provided above what other reasons, if any, provided by the employer will an HSA custodian/trustee accept given that the IRS stated these are “some examples of the errors which may be corrected”. Finally, the contribution and the return of such contribution amount(s) made in error to the 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 have 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. Financial organizations will be served best by suggesting to employers interested in making contributions to its employees’ HSAs to confirm employee eligibility and contribution amounts, prior to making contributions.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or 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.