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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.

 

The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.

Emerald Law– Emerald is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Emerald enjoys stand-up comedy, live music and writing non-fiction.