IRS Releases Informal Guidance on Mistaken HSA Contributions

The IRS Office of the Chief Counsel recently re-issued an information letter related to contributions mistakenly made to an employee’s HSA. The guidance is in response to a taxpayer’s letter dated September 2015 requesting clarification on circumstances under which an employer may recoup contributions to an employee’s HSA. Generally, such information letters cannot be relied upon as official guidance. However, they do provide insight as to how an IRS representative may view similar circumstances.

As background, contributions to an employee’s HSA are generally non-forfeitable, which means once the contribution has been made to the account, the employer can’t recoup it. There are two exceptions provided in official IRS guidance. The first involves an individual who was never HSA eligible. If they were never HSA eligible, they were not eligible to open the account or receive the contributions. Under those circumstances, the employer may work with the HSA trustee to recoup the contributions.

The second exception to the non-forfeitable contribution rule involves an individual who has contributed more than the annual statutory maximum limit set by the IRS. For example, if an employer’s contribution to an employee with self-only coverage in 2019 resulted in the employee exceeding the $3,500 statutory limit, the employer could work with the HSA trustee to recoup the amount that exceeds the limit.

In Information Letter 2018-0033, the IRS informally indicates that an HSA contribution amount could be recouped if there is clear documentary evidence of an administrative or process error. This is consistent with corrective actions under other laws that require that the parties be placed back in the same position as if the error had not occurred. The letter provides some examples that might fall under this standard:

  1. The employer withholds more than the employee actually elected
  2. An employer contributed the wrong amount because an incorrect spreadsheet was accessed or employees with similar names were switched
  3. A payroll administrator incorrectly enters data
  4. Duplicate payroll files are transmitted
  5. An employee’s election change is not processed timely
  6. A decimal point was set incorrectly

Again, the letter cannot be relied upon as official guidance. If circumstances are similar to one of the identified events above, it may be possible for an employer to recoup the payment. The employer would want to discuss with outside counsel and the HSA trustee to determine options.

Information Letter 2018-0033 »