Ask Penny: How can I recover mistaken HSA contributions?

February 28, 2019

Typically, 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 in 2008 (Notice 2008-59) identified the limited circumstances under which an employer may seek the direct return of HSA contributions from the HSA trustee or custodian. These situations include:

Contributions made on behalf of employees who were never HSA-eligible

If an employer makes an HSA contribution to an individual’s account and the individual is not HSA-eligible, the employer can recover the contribution as if the HSA never existed. The employer must advise the account trustee of the mistake and ask 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.

Contributions made in excess of the annual statutory limit

If an employer mistakenly makes a contribution in excess of the HSA statutory limit (for 2019, the contribution limit is $3,500 for individuals or $7,000 for family), the employer can re-coup the excess as described above or report the contribution as taxable income. 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.

The IRS recently issued Information Letter 2018-0033, which expands the instances in which an employer can re-coup HSA contributions it made on behalf of its employees. The letter clarifies that Notice 2008-59 was not intended to provide an exclusive set of circumstances in which an employer may request the return of HSA contributions. The letter confirms that where there is clear documentary evidence of an administrative or process error, the employer may request the return of the contributed amounts, with any correction making it as if the error had never occurred.

Information Letter 2018-0033 provides the following examples of the administrative or process errors for which employers may seek to recover HSA contributions:

• An amount withheld and deposited in an employee’s HSA that exceeds the amount shown on the employee’s payroll election
• An amount an employer mistakenly contributed to an employee’s HSA due to an "incorrect spreadsheet" or because employees with "similar names" are confused
• An incorrect amount that is withheld and contributed to an employee’s HSA because it is incorrectly entered by a payroll administrator
• An amount an employee receives as a second HSA contribution because duplicate payroll files are transmitted

• An incorrect amount an employee receives as an HSA contribution resulting from delayed processing of a payroll withholding change so that amounts withheld and contributed are greater than (or less than) the employee elected
• An amount an employee receives because an HSA contribution amount is calculated incorrectly due to disparity between elected annual contribution and actual number of pay periods
• An amount an employee receives as an HSA contribution because the decimal position is set incorrectly, resulting in a contribution greater than intended

For additional information:  https://www.irs.gov/pub/irs-wd/18-0033.pdf