More Options for Employers to Recoup HSA Contributions
As an HSA trustee or custodian, you’ve likely received a request from an employer to recoup or recover all or a portion of an HSA contribution made on an employee’s behalf. In the past, an employer’s ability to recoup HSA contributions was believed to be limited by the guidance contained in IRS Notice 2008-59, which mentions two specific circumstances where recouping is allowed: 1) contributions exceeding the statutory limit and 2) contributions made to employees who are not HSA eligible. But in late 2018, the IRS released Information Letter 2018-0033, providing additional guidance.
The information letter contains an expanded list of circumstances under which an employer may recoup an HSA contribution amount transmitted to a custodian or trustee. It also states that the two circumstances specified in Notice 2008-59 were not meant to be exhaustive, though this was not apparent when that guidance was issued.
In light of this new guidance, you may want to consider evaluating and updating your internal procedures for responding to an employer request to recoup, as well as any educational materials you may present to clients.
Expanded List of Circumstances
The information letter contains several new examples of situations in which recouping may be appropriate, but emphasizes that the guidance is not intended to capture every allowable circumstance for recouping.
Amounts withheld and deposited that exceed an employee’s HSA salary deferral election
Amounts allocated to an employee that the employer did not to intend to contribute and were inadvertently contributed because of an incorrect spreadsheet being transmitted, or due to confusion between employees with similar names
Amounts an employee receives as a result of a payroll administrator entering incorrect amounts or because duplicate files are transmitted
Amounts an employee receives because a change in payroll election was not processed timely
Amounts an employee receives because the amount is incorrectly calculated (e.g., full-year elections allocated over an incorrect number of payrolls, an incorrect decimal point, etc.)
The information letter emphasizes that if there is clear evidence of an administrative or processing error, recouping may be appropriate. Employers are encouraged to maintain documentation in support of their recouping request.
When You Receive a Request
HSA balances are generally nonforfeitable, but in circumstances such as those described in Information Letter 2018-0033, the HSA owner would not be considered to be forfeiting amounts to which she was entitled. Still, because of this nonforfeitability principle, it may be advisable to inform HSA clients of the employer’s recoupment request. While their consent is certainly desirable from a customer relations standpoint, it is not essential if the employer’s error is clearly supported by evidence presented.
Amounts returned to an employer under such circumstances should not be reported, either as contributions or distributions (i.e., do not reflect recouped amounts on IRS Form 1099-R or Form 5498). Be sure to follow the terms of the HSA document, but it is highly probable that the document will not address recouping contributions. You’ll likely also want to update any brochures and marketing materials that you provide to employers to reflect the options this new guidance provides.