IRS Elaborates on Employers Recouping Contributions

The IRS recently released Information Letter 2018-0033 concerning mistaken contributions to HSAs. More specifically, the information letter provides specific situations outside of the limited situations described in Notice 2008-59 (i.e., the employee was never eligible to contribute to an HSA or the amount contributed exceeds the maximum contribution allowed under § 223(b)) in which an employer may recoup HSA contributions.

The information letter indicates that Notice 2008-59 was not intended to provide an exclusive set of circumstances in which an employer may recoup contributed amounts. Rather the notice further states, “… 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 who assert that mistaken contributions were made under this standard would be prudent to retain documentation supporting such error.

The information letter lists the following as examples of the types of errors that may be corrected under the standard quoted above.

  • Contribution is greater than the amount shown on the employee’s HSA salary reduction election
  • Employer contribution was received by an employee in error when an incorrect spreadsheet was accessed or because employees with similar names were confused with each other
  • Contribution amount was incorrectly entered by a payroll administrator (either in-house or third-party) causing the incorrect amount to be contributed
  • Duplicate contributions were received due to the transmission of duplicate payroll files
  • Contribution was received in error because a change in employee payroll elections was not processed timely
  • Contribution amount was calculated incorrectly, such as a case in which an employee elected a total amount for the year and that amount was allocated by the system over an incorrect number of pay periods
  • Employee received an incorrect contribution amount because the decimal position was set incorrectly resulting in a contribution greater than intended

While information letters are furnished by the IRS National Office in response to requests for general information by taxpayers, by congress-persons on behalf of constituents, or by congress-persons on their own behalf and do not rise to the level of official guidance, information letters do provide some insight into the IRS’s position on a topic. With that said, the biggest takeaway from Information Letter 2018-0033 may be that the circumstances highlighted in Notice 2008-59 and Information Letter 2018-0033 are merely examples and do not constitute an exhaustive list of situations in which an employer may recoup HSA contributions made in error.

If an employer claims to meet the criteria outlined in the information letter, it would be prudent for the employer to maintain documentation to support how the mistaken contribution occurred.

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