Employee Closed Bank Account

[Chaz]

During open enrollment, an employee elected to make HSA contributions on a pre-tax basis through payroll deductions under the employer's cafeteria plan. A month or so ago (i.e., mid-year), the employee requested that her HSA provider liquidate and close her HSA account. The employee never requested that her employer stop the HSA deductions from her pay. The employee remains employed and covered by the qualifying HDHP.

The employer has just become aware of this situation. A few payroll periods have passed since the employee closed her HSA account and the employer deducted the elected amount from her pay. (The employer is not sure where the amounts deducted actually are now.)

Any idea what the employer should do now with respect to these amounts? Should the employer treat the closure of the account as an election to stop payroll deductions and refund her the withheld amounts even though she did not comply with the plan's election change procedure?

Thanks!

[hr for me]

Did the employer not get notice when transferring the contributions to the HSA administrator? Is it one single HSA admin for all employees or do you allow the employee to choose (much like say direct deposit)?

I do different transactions that deal with accounts (EFTs and DDs) and we always get a pretty immediate notice that the account is closed (with 3 or so business days from the date of the transfer). Sometimes we get an updated account number if the participant just changed acct #s (say due to fraud).

If the HSA admin didn't reject them, then I suspect the employee still has a balance there and would need to ask for another distribution. I don't see where it would be the employer's responsibility to get the refund and/or change the taxable records (W-2 wages, etc) of the employee since the employer was following the latest election. And no, I would not say closing an account is an election unless your enrollment paperwork states that it is.

Is the HSA covered under a cafeteria plan? If so, it must follow those rules and change can't be made retroactively.

To me, this sounds like this one is all on the employee, but I would want to know where the deductions were credited by the HSA holder.

[Chaz]

I understand everything that you are saying but the employer did not receive notification until a month or so after the account was closed. There are multiple payroll periods of deductions designated for this employees HSA that are somewhere (the employer says "limbo" but I say they are in someone's account, whether it be in the payroll provider's or the HSA bank's general account) and a home needs to be found for those amounts.

From my understanding, the HSA account was definitely closed and liquidated at the employee's request. The employer did not get any notice about this until the employee mentioned it recently.

The amounts were deducted under a cafeteria plan and it is true that the employee did not follow the employer's election change procedure. But was is the employer to do? There is no where to deposit the deducted amounts. Are you saying that the employer can simply keep the funds (and any other amounts contributed before the employee follows the correct procedure)? That doesn't sit right with me.

The only possibility that I can think of is to treat the employee's request to close and liquidate the account as constructively requesting that the employer cease the pre-tax deductions. That would mean that the subsequent payroll deductions were "prospective" from the date of the election change. The employer would then just add those amounts into the employee's pay in an upcoming payroll cycle,

Any other thoughts?

[hr for me]

I am not saying the employer keep the funds at all. I am saying it is up to the participant and the HSA admin to find the money unless the HSA admin did notify payroll and payroll didn't notify the employer. You need to find out where in the process it failed. If the payroll company knew it was rejected and didn't inform the employer/HR/benefits, that is a failure. If the money is sitting in a payroll account vs the HSA account, you might have some leeway on refunding as wages on payroll.

But you didn't answer my question as to whether your HSA falls under any Section 125 plan? Once they come out of the check, they go to the HSA and now the employer has no right to withdraw them on behalf of the participant. There is no "mistake in fact" on the employer's part since they were never informed by the participant that the participant wanted the deductions stopped.

Since it doesn't sound there were notifications that raised any flags in the whole process for multiple payrolls, I am suspecting the regular process happened and the HSA admin continued to accept the contributions on a "closed" account. Hopefully that is the case. Otherwise you obviously need a better communication system for when HSA contributions are rejected.

Otherwise right now you have a very large audit issue where money went out of the employer's accounts but never ended up where it was supposed to go. Who is comparing payroll deductions to the receipts at the HSA admin? Can the payroll provided give you copies of the deduction files/list/transactions that were sent to the HSA so that you can match it back to what the employer was charged each payroll period? Who is comparing the payroll totals to what is paid to the payroll provider, etc? Who is looking at the timing of the deductions vs the credits to the employees HSA accounts?

I would sit down and map how/when the amounts are calculated and by whom and how they are transfered and then how the employers money works its way through the system for the same amounts and see where it went wrong. Again unless it went into the closed HSA, you have an major lack of audit of company funds issue.

[Chaz]

As I mentioned in my initial post, the funds were contributed on a pre-tax basis through the employer's cafeteria plan.

I agree that, once amounts are deposited in a participant's HSA account, an employer cannot get them back. But, the amounts seemingly did not "go to the HSA" as there was no HSA account to go to. How can funds go into a closed account?

The employer is investigating where the money is but, at the end of the day, if the employee did indeed purposively close his account and does not want to open a new one, what should the employer do once it tracks down the funds?

[GBurns]

This makes no sense. The deducted amounts were sent to a closed account, which means that they were never accepted or credited to the named account (now closed). The money is either still in the employer's Accounts Payable (Payroll Payable), just like any uncashed check, or it is in a Suspense Account at the entity which provided the HSA account. This is just like any other check that is not received or is not cashed. The audit trail is similar and there should be no problem in finding out where the money is, since the are only 2 places where it could be.

Since this is a salary reduction done through your cafeteria plan and subject to those change of election rules. Closing the account to which the funds are to be deposited does not cause a change in election. The salary reductions continue for the election period.

Where do the funds go, now that the original account is closed? I suggest that you inform the employee, in writing, of the requirement of an account for the deposits. Usually, I see an agreement between the HSA holder and either an HSA Bank or Administrator. This agreement would give instructions regarding what to do in a case such as this. Usually, an account can be opened on behalf of the HSA holder. Have you seen any such Agreement? Have you informed the HSA Administrator of the situation?

[My 2 cents]

I do not work on cafeteria plans, but absent a sufficient change of status, isn't the employee required to continue having amounts withheld from pay through the end of 2015? I agree that closing the account into which they were being put would not change that. Also, are their rules requiring the employee to either use the funds for approved expenses or keep them in an account unavailable for normal personal use? There aren't hardship rules or any other rules that would allow an employee to just take the money back, are there?

[hr for me]

You can use the funds from an HSA for normal personal use/hardship, but you would be liable for taxes and the 10% penalty on the amount. (some people depend on never being audited though) Other than that, I know of no other way to allow the employee to get the money back once it was sent to the HSA admin without being able to prove some "mistake in fact" (such as the employer did get a form for a real change in status and forgot to stop taking the deductions or sent a wrong deduction file for a prior pay period, etc(

If the money was sitting in AP payroll, I guess an argument could be made to refund through payroll with regular taxes deducted, but not if there is no change of status under a café plan. And this is not something I would allow to be done at our company. Instead if the employee got to self direct to an individual HSA, I would ask for new account information. We however require all employees to use the same HSA administrator and only fund 1 time per year. They can transfer it however they are allowed.

But again, maybe because I am in charge of payroll and benefits, I am still wondering how this money has been sitting somewhere for multiple payroll periods and no one noticed or communicated it to others. Not good audit trails.