Pension & Benefits News IRS releases information letters concerning FSAs, HSAs
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Tuesday, February 19, 2019

IRS releases information letters concerning FSAs, HSAs

By Pension and Benefits Editorial Staff

The IRS has released two health care-related information letters, which were prepared in response to requests for general information by taxpayers or by government officials on behalf of constituents. INFO 2018-0032 addresses debit card payments in connection with health flexible spending arrangements (FSAs) and INFO 2018-0033 addresses contributions made in error to health savings accounts (HSAs).

The IRS notes that information letters provide general statements of well-defined law without applying them to a specific set of facts and are for informational purposes only. Information letters are not a ruling and may not be relied on as such.

FSAs. INFO 2018-0032 addresses an inquiry from Sen. Martin Heinrich (D-NM) on behalf of one of his constituents who had his FSA debit card declined at a health service medical facility. The debit card was declined because the medical facility “is not an IRS qualified merchant based on its merchant code.” Heinrich asked the IRS to clarify why the IRS does not recognize the medical facility as a qualified merchant.

The IRS noted that employer-sponsored health plans must limit use of FSA debit cards to physicians, dentists, vision care offices, hospitals, and other medical providers (as defined by the merchant category code (MCC)). While the IRS requires that debit card charges for health FSAs be limited to certain health care providers, the IRS does not control the MCCs that the debit card issuers use. The MCC assigned to a provider is determined by the provider and the debit card issuer, so the IRS recommends the constituent contact his health plan to find out why the transaction was declined and to pursue other methods that may be available to have his medical expense reimbursed without use of the card.

HSAs. INFO 2018-033 addresses a request for information concerning mistaken contributions to an HSA. In the information letter, the IRS reviews the guidance provided in IRS Notice 2008-59, regarding the limited circumstances under which an employer may recoup contributions to an employee’s HSA, as follows:

  • If an employee was never an eligible individual, then the HSA never existed and the employer may correct the error, by requesting the financial institution return to the employer the amounts mistakenly contributed to the employee’s HSA.
  • If the employer contributes amounts to an employee’s HSA that exceed the maximum annual contribution allowed, the employer may correct the error. However, if the amounts contributed are less than or equal to the maximum annual contribution allowed, the employer may not recoup any amount from the employee’s HSA.
  • If an employer contributes to the HSA of an employee who ceases to be an eligible individual during a year, the employer may not recoup any amounts that the employer contributed after the employee ceased to be an eligible individual.

According to the information letter, “Notice 2008-59 does not specifically address other situations in which contributions to an employee’s HSA are the result of the employer’s or trustee’s administrative or process errors, but the notice also was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributed amounts. Rather 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 should maintain documentation to support their assertion that a mistaken contribution occurred.”

INFO 2018-0033 provides several examples of the type of errors which may be corrected under the standard described above, such as:

  • An amount withheld and deposited in an employee’s HSA for a pay period that is greater than the amount shown on the employee's HSA salary reduction election.
  • An amount that an employee receives as an employer contribution that the employer did not intend to contribute but was transmitted because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.
  • An amount that an employee receives as an HSA contribution because it is incorrectly entered by a payroll administrator (whether in-house or third-party) causing the incorrect amount to be withheld and contributed.
  • An amount that an employee receives as a second HSA contribution because duplicate payroll files are transmitted.
  • An amount that an employee receives as an HSA contribution because a change in employee payroll elections is not processed timely so that amounts withheld and contributed are greater than (or less than) the employee elected.
  • An amount that an employee receives because an HSA contribution amount is calculated incorrectly, such as a case in which an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods.
  • An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended.

SOURCE: INFO 2018-0032 and INFO 2018-0033, released December 28, 2018.

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