IRS Clarifies When Employers May Recoup Mistaken HSA Contributions

The IRS previously issued Notice 2008-59 which answered frequently asked questions about health savings accounts (HSAs).

Questions and Answers 23, 24 and 25 of IRS Notice 2008-59 clarified certain limited circumstances under which an employer may recoup contributions to an employee’s HSA. If it is found that an employee was never eligible for the HSA or if an employer contributes to an employee’s HSA an amount that exceeds contribution limits, the employer can request the mistaken amounts be returned. However, if an employer has made contributions to an eligible employee’s HSA, and the employee becomes ineligible, the contributions made by the employer may not be returned.

In Information Letter 2018-0033, the IRS says Notice 2008-59 does not specifically address other situations in which contributions to an employee’s HSA are the result of the employer’s or trustee’s administrative or process errors, but the notice also was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributed amounts.

In the letter, the IRS offers some examples of the type of errors which may be corrected, including:

• 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.

The IRS says employers should maintain documentation to support their assertion that a mistaken contribution occurred.