Recovering Mistaken HSA Contributions (article)
Generally, an employer contribution to an employee’s health savings account (HSA) is immediately fully vested, and the employer cannot re-coup the contribution under any circumstances. An IRS pronouncement released 10 years ago (Notice 2008-59) provides two instances in which the employer can recover a mistaken contribution:
- Accountholder Ineligibility
- If an employer makes an HSA contribution to an individual’s account, and if the individual is not HSA-eligible, the employer can recover the contribution based on the theory that an HSA never existed. The employer can recover the contribution by advising the account trustee of the mistake and asking for reimbursement. If this is not accomplished by the end of the tax year, the employer must show the mistaken contribution as taxable compensation on the employee’s Form W-2.
- Employer contribution when an individual becomes ineligible. If an individual is HSA-eligible, but later becomes HSA-ineligible, employer contributions made after the individual becomes ineligible cannot be recovered by the employer.
- Excess Contributions. If an employer mistakenly makes a contribution in excess of the HSA statutory limit (for 2019, the contribution limit to an HSA is capped at $3,500 for individuals or $7,000 for family), then the employer can re-coup the excess, as described above; or if this is not accomplished by the end of the tax year, the excess amount would be reflected on the individual’s Form W-2. It is important to note that if an employer mistakenly makes a contribution in excess of what the employer intended to make, but the contribution is not in excess of the statutory limit, then no refund would be available.
A recently released Treasury Department Information Letter 2018-0033 expands the instances in which an employer can re-coup excess HSA contributions; they are:
- 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 in which 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; and
- An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended.