Oops! When an Employer may Recover Mistaken HSA Contributions

Errors occur; they are part of this human life. We hope when we err it’s nothing “major” and a “quick fix” will take care of the mishap.  However, sometimes a minor error in the employee benefits world can be costly. Today’s topic is about what can be done (or not) if an employer mistakenly contributes too much to an employee’s Health Savings Account (HSA).

The IRS recently published a letter outlining guidance regarding when and under what circumstances an employer, who mistakenly contributes to an employee’s HSA, can retrieve those funds.[1]  Access the letter to read the full text; if, however, you want the 411, please keep reading.  Also, don’t forget to check out our Compliancedashboard® activity to refresh your brain on HSA basics.

Employers may request the return of contributed amounts under specific circumstances (examples outlined below). Generally, if there is clear documentary evidence that an administrative or process error (by the employee or trustee) caused the excessive fund contribution, the employer may request the financial institution return the amounts to the employer, ensuring such correction places the parties in the same position as they would have been if the error had not occurred.

An employer may correct an HSA contribution error[2] for an amount…

• withheld and deposited that is greater than the amount shown on the employee’s salary reduction election;
• resulting from an incorrectly accessed spreadsheet or because employees with similar names are confused with each other;
• incorrectly entered by a payroll administrator (whether in-house or third-party) causing the incorrect amount to be withheld and contributed;
• received by the employee because duplicate payroll files are transmitted;
• deposited into an employee’s HSA account because there was a change in the employee payroll election that was not processed timely (whether greater than or less than the employee election);
• incorrectly calculated, (e.g. an annual amount that is allocated by a system over an incorrect number of pay periods); or
• received because the decimal position is set incorrectly, resulting in a contribution greater than intended.

Noteworthy[3]:

• If an employee was never an eligible individual[4], then an HSA never existed, and the employer may correct the error by specifically requesting the financial institution return to the employer the amounts mistakenly contributed to the employee’s HSA.
• If an employer contributes amounts that exceed the maximum annual contribution as permitted by law[5], the employer may correct the error by requesting the financial institution return the excess amounts to the employer.
  • However, if the amounts contributed by the employer are less than or equal to the maximum annual contribution allowed, the employer may not recoup any amount from the employee’s HSA even though the employer claims certain contributions were made in error.
• If an employer contributes to the HSA of an employee who ceases to be an eligible individual during the year, the employer may not recoup any amounts the employer contributed after the employee ceased to be an eligible individual.

[1] Section 223(d)(1)(E) of the Internal Revenue Code provides that the interest of an individual in the balance in an HSA is nonforfeitable.

[2] This is not meant to be nor is it a full listing of every scenario in which an employer may request a return of funds.

[3] The following three examples are taken from responses to Questions and Answers 23, 24, and 25 of IRS Notice 2008-59, 2008-29 I.R.B. 123.

[4] I.R.C. § 223(c).

[5] I.R.C. § 223(b).