The Internal Revenue Service (IRS) outlined when employers can recover mistaken HSA contributions in IRS Letter 2018-0033 and IRS Notice 2008-59. Generally, Internal Revenue Code (IRC) Section 223(d)(1)(E) provides that an individuals’ interest in the balance of an HSA is nonforfeitable.
Based on the IRS guidelines, employers can recover mistaken HSA contributions in the following circumstances:
- If an employee was never an eligible individual under IRC 223(c), an employer may request the financial institution return the amounts to the employer. However, if an individual becomes ineligible during the year, the employer cannot recover amounts contributed after the employee becomes ineligible. See IRS Notice 2008-59 Q&A 23 and 25 for examples.
- If employer contributions exceed the maximum annual contributions allowed under IRC 223(b) due to an error, an employer may request the financial institution return the amounts to the employer. However, if the contributions were less than or equal to the maximum annual contribution, the employer may not recover mistaken contributions. See IRS Notice 2008-59 Q&A 24 for examples.
- If there is clear documentary evidence that there was an administrative or process error, an employer can request the return of mistaken contributed amounts. Any requested amounts should put the parties in the same position as if the error had not occurred. Employers should maintain documentation to show there was an administrative or process error that caused the mistaken contribution to occur. Examples of administrative or process errors outlined in IRS Letter 2018-0033 include:
- An amount withheld and deposited that is greater than an employee’s election for HSA salary reductions.
- An erroneous employer contribution due to accessing an incorrect spreadsheet or mistaking employees with similar names.
- An error by a payroll administrator that causes the incorrect amount to be withheld and contributed.
- A duplicate HSA contribution because duplicate payroll files are submitted.
- An employee’s HSA election was not changed in time, which caused contributions to be greater (or less) than the employee election.
- An error due to miscalculating HSA contributions. For example, an employee’s yearly HSA election was allocated to the incorrect number of pay periods.
- An error in the decimal position resulting in a greater contribution.
The IRS states that the above guidance is for informational purposes only. Employers are always encouraged to speak with counsel on how to properly remedy these situations. They may have tax implications that are not addressed in this guide.
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