Tax Analysts published a copy of the letter from the IRS to officials at UMB Bank and the American Bankers Association in Tax Notes Today on April 8 that explained that Notice 2008-59’s list of conditions under which an employer may take back a contribution to an employee’s HSA is not an exclusive list of such situations. (2016 TNT 68-9)
If an employer has provided for contributions to be made to eligible employee’s HSAs under Section 223, a problem arises if the contribution is, in fact, in error and excessive. IRC Section 223(d)(1)(E) provides that a taxpayer’s balance in an HSA is nonforfeitable. Notice 2008-59 provided two conditions under which an employer could recover an erroneous payment.
Question and Answer 23 provided that if an employer had contributed more than the maximum contribution to an HSA allowed for an employee then the amount could be recovered. However so long as the contribution was less than the maximum under the IRC the amount could not be recovered even if the employer claimed the contribution was in error.
Under Question and Answer 24 of the Notice the employer could recover a contribution if the employee was never an “eligible individual” under Section 223(c) (that is, either was not covered by a high deductible health plan as of the first day of the month or had ineligible coverage) since the HSA itself could not be established.
But Question and Answer 25 provided that if the employee ceased to be an eligible individual during the year the employer could not recover any overcontribution to the HSA.
The letter appears to have written to address the concern that those could be interpreted as the only occasions under which an employer could receive a repayment of a contribution made to an HSA. While the letter is not authority of any sort, it does provide commentary on whether the notice truly contains the exclusive list of conditions under which repayment may be made.
The letter, authored by Harry Beker, Chief, Health and Welfare Branch,Office of Associate Chief Counsel of the IRS, states that “was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributed amounts.”
Rather Mr. Beker goes on to state:
..[I]f there is clear documentary evidence demonstrating that there was an administrative or process error, an employer may request that the financial institution return the amounts to the employer, with any correction putting the parties in the same position that they would have been in had the error not occurred. Employers should maintain documentation to support their assertion that a mistaken contribution occurred.
Mr. Beker then goes on to note specific examples of the types of errors he was referring to:
- An amount withheld and deposited in an employee's HSA for a pay period that is greater than the amount shown on the employee's HSA salary reduction election.
- An amount that an employee receives as an employer contribution that the employer did not intend to contribute but was transmitted because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.
- An amount that an employee receives as an HSA contribution because it is incorrectly entered by a payroll administrator (whether in-house or third-party) causing the incorrect amount to be withheld and contributed.
- An amount that an employee receives as a second HSA contribution because duplicate payroll files are transmitted.
- An amount that an employee receives as an HSA contribution because 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.
- An amount that an employee receives because an HSA contribution amount is calculated incorrectly, such as a case in which an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods.
- 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 guidance may prove useful both to organizations who are custodians of HSA accounts that receive requests for the return of funds from employers, and for employers who face resistance to such requests from custodial institutions.
While not truly authoritative, presumably the IRS was aware that a letter to the American Bankers Association on the matter would be an important document that was likely to be relied upon by custodians. Now that the letter has been made public (probably something the IRS anticipated) it will be interesting to see if the IRS decides to issue more formal guidance on the matter.
A truly “belts and suspenders” approach would still be to seek a private letter ruling on the matter, but the reality is that doing so is rather expensive. But due to the nasty rules for making contributions that don’t meet the comparable contributions rules of §4980G (a penalty equal to 35% of the total contributions made on behalf of all employees), an employer that was unable to retrieve funds erroneously deposited in one employee’s HSA could be faced with, in the alternative, a need to replicate the error in all other eligible employee’s accounts.