Examples of Situations Where Employers Can Recover Erroneous HSA Contributions Listed in Information Letter

In Information Letter 2018-33 the IRS provided some guidance on situations when an employee may recover amounts transferred by error to an employee’s health savings account (HSA).

As a general rule, an individual’s interest in an HSA is nonforfeitable.[1]  However, the IRS in Notice 2008-59 provided for limited circumstances where an employer who funds an employee’s HSA account in error can recover the funds.

The notice has a series of questions and answers that address specific situations where the funds can be recovered.  But this letter reminds us that the notice was not meant to be the exclusive list of situations where funds may be recovered.  The letter notes:

Notice 2008-59 does not specifically address other situations in which contributions to an employee's HSA are the result of the employer's or trustee's administrative or process errors, but the notice also was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributed amounts. Rather if 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.

The letter then goes on to list other situations where recovery of the funds would be appropriate:

  • ·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.

[1] IRC §223(d)(1)(E)