IRS Letter Expands Circumstances When Employers May Recover HSA Contributions

The IRS has released for publication an information letter that provides details on circumstances allowing an employer to request the return of Health Savings Account (HSA) contributions made on behalf of its employees. The IRS describes in Information Letter 2018-0033 certain contribution recovery circumstances that go well beyond the previous guidance found in IRS Notice 2008-59, which has served as a primary source of information on HSA issues and administrative procedures.

Notice 2008-59

Notice 2008-59 described limited circumstances under which an employer may seek the return of HSA contributions by an HSA custodian or trustee. These limited circumstances included contributions made on behalf of employees who were never HSA-eligible, and contributions in excess of the annual statutory contribution limit.

Information Letter 2018-0033

The information letter lists the following additional circumstances as examples of errors that also may be corrected.

  • HSA contribution exceeded an employee’s payroll withholding election
  • Amount was mistakenly contributed to an employee due to an “incorrect spreadsheet” or “similar names … confused with one another”
  • Contribution was incorrectly entered by a payroll administrator (in-house or third-party)
  • Additional contribution was received due to a duplicate payroll file transmission
  • Over-contribution resulted from delayed processing of a payroll withholding change for an employee
  • Over-contribution resulted from disparity between elected annual contribution and actual number of pay periods
  • Incorrect contribution resulted from misplaced decimal point

As is evident in these itemized reasons, the IRS has now gone well beyond the limited circumstances for employer recoupment of HSA contributions that were authorized by Notice 2008-59, the most detailed guidance on the subject available prior to Information Letter 2018-0033.

While an Information Letter is not considered as elevated in the IRS guidance hierarchy as a notice, revenue ruling, or revenue procedure, it nevertheless can be considered to express the agency’s intent for how other guidance—such as Notice 2008-59—may be interpreted. Perhaps most telling in the letter is the statement that the previously-issued Notice 2008-59 “was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributed amounts.”