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Delinquent Remittance of Employee HSA Contributions


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What are the consequences of an employer failing to timely deposit employee contributions into employees' HSAs?  According to DOL FAB 2006-02, "employers who fail to transmit promptly participants’ HSA contributions may violate the prohibited transaction provisions of section 4975 of the Code," but can find nothing more definitive. 

If it is a PT or other fiduciary breach, is the employer able to correct under the DOL VFCP?  The regs clearly list delinquent remittance of participant contributions to pension plans, insured welfare plans and welfare plan trusts as eligible transactions under the VFC program, but there is no mention of HSA contributions.  So a plain reading of the VFCP regs would suggest no, the employer would not be able to correct under the DOL VFCP.  Is there are other guidance I have missed? 

Thanks in advance.

 

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I'm not aware of any guidance on this issue beyond FAB 2006-02.  I interpret that to be require employee contributions be deposited in the HSA as of the earliest date in which the contributions can be reasonably segregated from the employer’s general assets, and in no event later than 90 days after the payroll deduction is made.

Failure to timely deposit HSA contributions could raise a potential prohibited transaction under IRC §4975, which creates an excise tax liability of 15% of the amount involved and must be reported on IRS Form 5330.

I posted a short discussion on the issue here for reference: https://www.theabdteam.com/blog/hsa-contribution-timing-requirements-2/

Note that sometimes this comes up where the employee fails to open the HSA with the custodian.  In that case, I do not believe these late deposit rules would apply.  Short discussion on that topic here: https://www.theabdteam.com/blog/employee-fails-to-establish-hsa-2/

 

DOL FAB 2006-02:

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2006-02

Are HSAs subject to the prohibited transaction provisions of section 4975 of the Internal Revenue Code?
Yes. Although the Department believes that HSAs meeting the conditions of FAB 2004-01 generally will not be ERISA-covered plans, the Medicare Modernization Act specifically provided that HSAs will be subject to the prohibited transaction provisions in section 4975 of the Code. In that regard, the Department’s plan asset regulation at 29 C.F.R. § 2510.3-102 states, in relevant part, that “[f]or purposes of [certain specified provisions of ERISA] and section 4975 of the Internal Revenue Code only . . . the assets of the plan include amounts . . . that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.” (Emphasis added). As a result, employers who fail to transmit promptly participants’ HSA contributions may violate the prohibited transaction provisions of section 4975 of the Code. See Code § 4975(c)(1)(D) (prohibited transactions include the “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”).

 

29 CFR § 2510.3-102(c):

(c) Maximum time period for welfare benefit plans.

With respect to an employee welfare benefit plan as defined in section 3(1) of ERISA, in no event shall the date determined pursuant to paragraph (a)(1) of this section occur later than 90 days from the date on which the participant contribution amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the date on which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages).

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Brian, thank you. It is helpful to know I wasn't missing something. 

I'm curious what your thoughts are on the following - Employer recently discovered that an employee contribution from 11/2019 had not been deposited into the employee's HSA. It's too late to fund the HSA for 2019. Should the employer deposit the contribution in the HSA now for the 2021 tax year? 

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That's a tough call.  First of all, the employee may no longer by HSA-eligible.  That would definitely eliminate the option if it were the case.

Even if the employee is still HSA-eligible, the extra contribution will run the risk of creating excess contributions based on how long the employee remains HSA-eligible this year (proportional limit), whether the employee had set elections to reach the maximum contribution limit (statutory limit), etc.

But ultimately if the employee is still HSA-eligible and approves the contribution being deposited as a 2021 amount with the understanding of the limits, that probably is the best approach.  The employer should consider some form of a missed earnings adjustment to compensate for the time lost.

Otherwise, the only reasonable approach would be to refund the contribution (potentially with an interest adjustment) as standard taxable income.  The employee could then choose to use the additional compensation to elect a higher pre-tax HSA contribution--which would essentially create an equivalent result.  If the employee is no longer HSA-eligible, the employer should consider a gross up.

Note that the employer probably has an issue with the 2019 Form W-2 (Box 12, Code W) in this situation that would also technically need correction.

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