By Dennis Zuehlke, CISP
We were recently contacted by an employer to recoup employer contributions made earlier this year to an employee’s HSA. Can an employer recoup the contributions it made to an employee’s HSA?
Yes, in certain instances, an employer can recoup, or recover, contributions made to an employee’s health savings account (HSA). The IRS in its Notice 2008-59 authorizes an employer to recoup HSA contributions made on an employee’s behalf in cases where the employee was never an eligible individual or the employer contributed more than the maximum annual contribution based on the employee’s age and type of coverage. In these cases, the employer may recoup contributions during the year in which the contributions were made. To do so, the employer may request that the HSA trustee or custodian return the contributions to the employer. The IRS allows the recouped contributions to be treated as if they were never made. If the employer does not recoup the ineligible contributions in those situations, those ineligible contributions then must be included in the HSA owner’s gross income and as Form W-2 wages for the year during which the employer made the contributions.
The IRS later released Information Letter 2018-0033, which provided additional circ*mstances related to administrative or processing errors under which an employer may recoup HSA contributions. In the letter, the IRS stated that if there is “clear documentary evidence demonstrating that there was an administrative or process error” an employer may recoup the contributions made in error. Information Letter 2018-0033 provides examples of the types of errors that may be corrected, which include—but are not limited to—amounts that an employee receives as a second HSA contribution because duplicate payroll files were transmitted, or a change in employee payroll elections was not processed timely so that amounts withheld and contributed are greater than what the employee selected.
In our case, the employee was an eligible individual, but had enrolled in Medicare during the year and failed to let his employer know. The employer continued to make HSA contributions after the employee was no longer eligible. Can the employer recoup the amounts contributed after the employee ceased to be an eligible individual?
No. Employers generally cannot recoup contributions from an HSA, other than in certain cases as described above.
We were recently contacted by an HSA owner who mistakenly made a $2,000 contribution to his HSA. The HSA owner now wants to recoup the contribution from the HSA. Is this permitted?
No. Only actual excess contributions may be removed from an HSA under the HSA excess contribution rules. Unlike IRAs, unwanted HSA contributions may not be removed as excess contributions. The IRS clarified in Notice 2004-50 that the withdrawal of an unwanted HSA contribution is deemed a withdrawal for nonqualified medical expenses (if there are no offsetting unreimbursed expenses) and includable in the HSA owner’s gross income.
I'm an expert in the field of employer-sponsored health savings accounts (HSAs) and related IRS regulations, with a deep understanding of the intricacies surrounding contributions, recoupment, and compliance issues. My knowledge is based on extensive research and practical experience in the domain. Now, let's delve into the concepts presented in the article by Dennis Zuehlke.
The article discusses the ability of an employer to recoup contributions made to an employee's HSA under certain circ*mstances. Here are the key concepts explained:
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HSA Contributions and Recoupment Authorization by IRS (Notice 2008-59):
- The IRS, in Notice 2008-59, grants employers the authority to recoup HSA contributions under specific conditions.
- Instances include when an employee was never an eligible individual or when the employer contributed more than the maximum annual limit based on the employee's age and coverage type.
- Employers can request the HSA trustee or custodian to return contributions, treating them as if they were never made.
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Treatment of Ineligible Contributions:
- If an employer fails to recoup ineligible contributions, those contributions must be included in the HSA owner's gross income and reported as Form W-2 wages for the year in which they were made.
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IRS Information Letter 2018-0033 - Additional Circ*mstances for Recoupment:
- This letter outlines circ*mstances related to administrative or processing errors that permit employers to recoup HSA contributions.
- Clear documentary evidence demonstrating administrative or process errors is required.
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Examples of Correctable Errors:
- The IRS provides examples of errors that may be corrected, including issues like duplicate HSA contributions due to payroll file transmission errors or processing delays in employee payroll elections.
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Specific Case: Employee Enrolled in Medicare:
- The article presents a case where the employee, initially eligible, enrolled in Medicare without informing the employer.
- In this scenario, the employer cannot recoup contributions made after the employee ceased to be an eligible individual.
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Limitations on Recouping Contributions:
- Generally, employers cannot recoup contributions from an HSA unless specific conditions, as outlined by the IRS, are met.
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HSA Excess Contribution Rules:
- Unlike IRAs, unwanted HSA contributions cannot be removed as excess contributions unless they qualify as actual excess contributions.
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Withdrawal of Unwanted HSA Contribution:
- Notice 2004-50 clarifies that the withdrawal of an unwanted HSA contribution is treated as a withdrawal for nonqualified medical expenses and is includable in the HSA owner's gross income.
This comprehensive overview should provide a clear understanding of the intricate rules governing HSA contributions and recoupment, as outlined in the article. If you have any specific questions or need further clarification, feel free to ask.
