The Internal Revenue Service (IRS) has released Information Letter 2018-0033 which lists seven new examples of situations where an employer can obtain a return of contributions made to an employee’s health savings account (HSA).
Employers should review the examples of mistaken HSA contributions in the Information Letter (as discussed below), and implement procedures to prevent any of the mistakes from taking place. If the employer does in fact make a mistaken HSA contribution, it should contact the HSA trustee or administrator to request a return of the money, using one or more of the IRS examples as justification.
Background
Individuals have a “nonforfeitable” interest in the balance of their HSA. Under this general rule, an employer (or other third party, such as creditor) may not access an employee’s HSA to obtain funds, including a return of employer contributions.
The IRS previously released Notice 2008-59, which contains three examples illustrating how the general rule operates in different situations. Two of the three examples in Notice 2008-59 relax the general rule, at least in part.
IRS Information Letter 2018-0033
The latest Information Letter contains seven new examples of situations where an employer may recover contributions made to an employee’s HSA.
The IRS states, in the Information Letter, that if there is “clear documentary evidence” demonstrating that an administrative or process error occurred, then the financial institution holding the employee’s HSA contributions can return them to the employer, provided that the correction puts the employer and employee in the same position that they would have been in had the error not occurred.
The Information Letter lists the following examples of “errors which may be corrected” by allowing the employer to recover contributions made to an employee’s HSA.
The examples set forth below are listed in the Information Letter, while the recovery amounts are based on our analysis of what the employer’s and employee’s position would have been without the administrative or process error:
Timing
The changes outlined in Notice 2008-59 permit the employer to recover funds so long as the recovery occurs while the applicable tax year is open. For example, if an employer contributed to the HSA of an employee who was never HSA eligible in 2018, the employer may seek to recoup its incorrect HSA contribution in 2018. If the amount is not recovered in 2018, then the employer is to treat the impermissible employer contribution as taxable income reflected on the 2018 Form W-2.
Unfortunately, Information Letter 2018-0033 did not include guidance as to the proper timing to recover mistaken or incorrect employer HSA contributions. While it may be reasonable to follow the guidance in Notice 2008-59 (which is generally to correct in the open tax year or treat as additional taxable on the Form W-2 if not recovered), further clarification on this point would be helpful.
Employer Action
Employers should review the examples of mistaken HSA contributions discussed above, and implement procedures to prevent any of the mistakes from taking place.
When a mistaken contribution is made to an employee’s HSA that fits one of the examples listed in the Information Letter or in Notice 2008-59, the employer should contact the HSA trustee or administrator (usually the bank) to recover the contribution. The employer should maintain documentation to support its assertion that a mistaken contribution occurred, in case of any future IRS inquiry.
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