IRS Says You Can Fix Your HSA Mistakes

Several months ago, the IRS released an information letter originally written in 2015 that appeared to expand an employer’s ability to correct mistaken health savings account (“HSA”) contributions. While the letter appears helpful at first glance, employers should proceed with caution.

Mistakes happen

In 2008, as part of a larger Notice on HSAs, the IRS issued limited guidance on correcting mistaken HSA contributions. That Notice stated employers could request the HSA trustee or custodian to return employer money if:

It was contributed to an HSA on behalf of someone not eligible to contribute to an HSA at any point during that year; or
The employer’s contribution exceeded the maximum annual HSA contribution allowed for that employee.

Other than those two situations, the Notice said, “[e]mployers generally cannot recoup amounts from an HSA….” For years, it was an open question what (if any) other situations were eligible to correct.

IRS says errors are correctable

The “new” IRS information letter says that the two scenarios in Notice 2008-59 were never intended to constitute an exclusive list. As a result, the new letter contains examples of situations where correction may be appropriate, such as:

The amount withheld and deposited in an employee’s HSA for a pay period is greater than the amount shown on the employee’s election. (If the employee elected an annual amount, it would seem the employer would need to wait until the end of the year to recoup the money.)
The employer makes an unintentional employer contribution because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.
The HSA contribution is incorrectly entered by a payroll administrator (whether in-house or third-party).
The employee receives a duplicate HSA contribution because duplicate payroll files are transmitted.
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. (It’s not clear why an employer would need to ask for money back if the amounts were less than the employee’s election. It seems the employer could just make up the difference in future payroll contributions.)
The HSA contribution amount is calculated incorrectly, such where an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods. (Presumably, this could happen where the payroll system divides an annual election by, for example, 24 payroll periods when the employee actually has 26.)
An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended. (This one is probably easiest to explain: “No, I did not intend to make a $10,000.0 contribution to that employee’s HSA.”)

There are limits

While the apparent expansion of the employer’s ability to recoup mistakenly-contributed HSA funds is good news, there are some limitations employers should keep in mind:

This letter does not constitute official IRS guidance — While it was issued by the IRS, it is not binding on the agency. In other words, an individual IRS agent is not required to follow it on audit. It also means the IRS can change its mind at any time. That said, the above scenario-list in the recent letter contains fairly clear cut mistakes, so the ability to correct them seems reasonable. Even so, employers should tread carefully.

You can only ask — Because HSAs are employees’ individual accounts (as opposed to plans maintained by the employer), all the employer can do is ask for the money back. If the HSA trustee or custodian does not want to follow this guidance (because, for example, it isn’t binding on the IRS), the employer cannot force the trustee or custodian to return the money.

You have to prove it — The letter itself states that employers need to keep “clear documentary evidence” showing that the contribution was in error. Merely your word will not be enough. The letter emphasizes the importance of maintaining records.

Mistakes happen

It was contributed to an HSA on behalf of someone not eligible to contribute to an HSA at any point during that year; or

The employer’s contribution exceeded the maximum annual HSA contribution allowed for that employee.

IRS says errors are correctable

The amount withheld and deposited in an employee’s HSA for a pay period is greater than the amount shown on the employee’s election. (If the employee elected an annual amount, it would seem the employer would need to wait until the end of the year to recoup the money.)

The employer makes an unintentional employer contribution because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.

The HSA contribution is incorrectly entered by a payroll administrator (whether in-house or third-party).

The employee receives a duplicate HSA contribution because duplicate payroll files are transmitted.

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. (It’s not clear why an employer would need to ask for money back if the amounts were less than the employee’s election. It seems the employer could just make up the difference in future payroll contributions.)

The HSA contribution amount is calculated incorrectly, such where an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods. (Presumably, this could happen where the payroll system divides an annual election by, for example, 24 payroll periods when the employee actually has 26.)

An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended. (This one is probably easiest to explain: “No, I did not intend to make a $10,000.0 contribution to that employee’s HSA.”)

There are limits

While the apparent expansion of the employer’s ability to recoup mistakenly-contributed HSA funds is good news, there are some limitations employers should keep in mind: