Erroneous employer contributions to an HSA - recoverable by employer or windfall to the employee?

[JDuns]

Assume a company contributes to HSAs established by employees (without relying on 125 rules to avoid the comperability rule).

Assume also that two employees are not, in fact, eligible for HSA contributions as follows:

Employee A - covered by spouses first dollar coverage and Medicare

Employee B - has a change in family status between open enrollment and January 1 and changes her election (but is not processed until after 1/1)

I know that Q&A 82 of Notice 2004-50 provides that an employer may not recoup "any part of the employer's contribution the the employee's HSA" (which I find pretty clear), but I have a client (and a provider) indicating that they think the employer can raid the HSA account and take back the employer contribution from these employees.

Does anyone see their argument or do you agree that the employee gets a windfall.

Thanks for your help!

[Gary Lesser]

I'm not sure it's such a windfall .

In the case of an employee who IS an eligible individual [HERE they're not], employer contributions (provided they are within applicable limits) to the employee's HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee's gross income. [sO HERE, not excludable] The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. [sO HERE, it is subject to.....]. There is also an excess contribution in the HSA that needs correcting and the gain removed may be subject to the additional 10% penalty tax (unless used for QMEs). [see IRC Secs 3231(e)(11), 3306(b)(18), and 3401(a)(22); Notice 2004-2 Q&A 19]

Hope this helps.