using 2023 HSA deduction amount on 2022 earnings

[Lex]

Thanks in advance if anyone can help me with this.

My company farms out the payroll to a very large payroll company. Our last pay period of 2022 went from 12/19/2022 to 1/1/2023. 1/1/23 was a holiday and since it fell on a Sunday, was celebrated the following Monday and went on the next paycheck (no one worked that day at all). Which means all earnings on that final 2022 paycheck issued on 1/6/23 were earned in 2022. 

For some reason, this payroll company used the new year (2023) HSA deduction amounts that each employee selected in November to begin with the new year for 2023 earnings instead of the 2022 HSA deduction amounts for each employee. (This is the amount each employee contributed to their HSA account each paycheck)

I cannot get them to correct this or show me any proof that they are allowed to withhold 2023 HSA deduction amounts on 2022 earnings

 

So I guess my question is- Is it legal to use the following years HSA deduction amount on the previous years earnings if that previous years check is distributed in the following year, but contains no following year earnings?

I hope that makes sense and thanks again.

[CuseFan]

Was that paycheck included on employees' 2022 W2s? If not, which I don't think it would or should be since it was paid in 2023, then I don't see how they could withhold a 2022 HSA on 2023 compensation. I don't think it matters when the compensation was earned, it matters when it is otherwise available to the employee (absent any deferral election) and when it is paid. What if the pay period covered a week in 2022 and a week in 2023 - would you expect a split election between the two years to be executed? What about 401(k) withholdings? Did you have anyone hit the maximum earlier in the year? Then did they have deferrals withheld from this paycheck?

With some pre-planning and consultation with your payroll provider, checks might possibly have been accelerate by a day to 12/31/2022 and then properly be accounted for in 2022 for all purposes. We had this exact situation two years ago, when the powers that be had to decide which year would have 26 bi-weekly payroll periods and which would have 27, and then delay or accelerate that final paycheck accordingly. Also note there is a one-week lag from earnings period to pay date, so even if that last paycheck was pushed into the next calendar/tax year, the compensation was attributable to the prior year. And all that was determined and communicated to employees during the third quarter of the first year in question.

[Dare Johnson]

Payroll uses cash basis - reportable in the year the employee receives the cash.  Since the paydate was 1/6/23, the payroll company was correct in using 2023 HSA amounts.

[Brian Gilmore]

Employee health plan and HSA contributions are taken pre-tax through the Section 125 cafeteria plan.  We don't have any guidance I'm aware of addressing these payroll year straddling issues for 125 purposes.  But I've always felt comfortable piggybacking on the 401(k) rules for these purposes, which basically allow it to go either way.

In other words, although compensation generally must actually be paid or made available to an employee within the year to be counted as compensation for that year, year-end payrolls do not always pay out by the end of the year.  The qualified plan regs allow for adjustments to address this minor timing difference.  I think the cafeteria plan can provide that compensation for a year includes amounts earned during that year (2022) but not paid until the next year (2023) solely because the timing of pay periods/pay dates.

Treas. Reg. §1.415(c)-2(e):

(e) Timing rules.
(1) In general.
(i) Payment during the limitation year. Except as otherwise provided in this paragraph (e), in order to be taken into account for a limitation year, compensation within the meaning of section 415(c)(3) must be actually paid or made available to an employee (or, if earlier, includible in the gross income of the employee) within the limitation year. For this purpose, compensation is treated as paid on a date if it is actually paid on that date or it would have been paid on that date but for an election under section 125, 132(f)(4), 401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b).
(2) Certain minor timing differences. Notwithstanding the provisions of paragraph (e)(1)(i) of this section, a plan may provide that compensation for a limitation year includes amounts earned during that limitation year but not paid during that limitation year solely because of the timing of pay periods and pay dates if—
(i) These amounts are paid during the first few weeks of the next limitation year;
(ii) The amounts are included on a uniform and consistent basis with respect to all similarly situated employees; and
(iii) No compensation is included in more than one limitation year.

[Lex]

Thanks very much for the help on this. I did not know it depended on when a check was issued rather than when the funds were earned. Lesson learned.