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Correcting Missed HSA Contributions

By Brian Gilmore | Published January 23, 2024

Question: How can employers correct missed HSA contributions?

Short Answer: Employers can make a deposit for a missed HSA contribution through the tax filing deadline (typically April 15) of the following year without the need to correct the employee’s Form W-2. After that date, employers have to consider the best approach based on all the facts and circumstances of the situation.

Missed Employer HSA Contribution: Current Year

Where an employer discovers that it missed funding an HSA contribution for an employee in the current year, the employer can simply make the missed contribution to the employee’s HSA upon discovery of the error. These mistakes frequently occur because of a payroll or benefits administration system error.

Potential Complications:

• Employees may argue that they should receive some form of lost earnings compensation for the duration of the failure. Although there are no specific rules addressing this (unlike, for example, the EPCRS lost earnings rules that apply in the 401(k) context), employers might consider accommodating such a request. If the additional amount is included in the HSA contribution, that will count toward the annual contribution limit, potentially requiring the employee to reduce their HSA contribution election.

• If the employee has terminated from employment, the HSA account with the employer’s designated custodian may no longer be open. In this case, employers should consider making the missed payment to the former employee as standard taxable cash compensation.

Missed Employer HSA Contribution: Prior Year (Correction by 4/15)

Employers frequently discover missed HSA contributions after the calendar year has closed. These discoveries often occur as part of a regular year-end payroll auditing process. They may also be discovered as part of the reporting process for HSA contributions on the Form W-2.

The good news is that whatever the reason for the error or the cause of its discovery, missed HSA contributions from a prior year are still an easily correctible mistake. The HSA rules provide that employers can make a prior year missed HSA contribution by the tax filing deadline without extension (generally April 15).

There are two communication steps required to ensure that the contribution is allocated to the prior year contribution limit:

1. The employer must notify the HSA bank that the contribution is to be allocated to the prior year; and
2. The employer must inform the employee that the contribution is to be allocated to the prior year.

No Form W-2 Correction Required

Employers must report all employer and employee HSA contributions made through payroll as a single aggregated amount on the employee’s Form W-2 in Box 12 using Code W.

• For more details: HSA Form W-2 Reporting

Employers are often concerned that making an HSA contribution for the prior year will require a corrected Form W-2c to report the additional contribution allocated to that prior year. However, IRS guidance is clear that an HSA contribution correction by the tax filing deadline (generally April 15) does not require any correction to the prior year Form W-2.

Rather, the IRS guidance confirms that employers simply report the prior year HSA contribution on the current year Form W-2 (issued the following January). Note that this may result in the employee’s Box 12, Code W showing an amount larger than the annual statutory HSA contribution limit. However, as long as the amount in excess of the limit is attributable to the prior year contributions made prior to the tax filing deadline, this will not present any issues.

Employee Addresses Additional Prior Year Contributions on Form 8889

On the employee side, the additional contributions made for the prior year are addressed via the Form 8889 that all individuals with HSA contributions or distributions must include with the individual tax return (Form 1040). This will ensure that the contributions are allocated to correct year and are consistent with the Form 5498-SA provided by the HSA custodian.

The Form 8889 Instructions include an “Employer Contribution Worksheet” that accomplishes two purposes to ensure proper reporting of HSA contribution amounts attributable to the tax filing year:

1. Prior Year Contributions Subtracted: The employee subtracts any amounts attributable to the prior year that were included on the current-year Form W-2 (because it was contributed by the prior year tax filing deadline); and
2. Current Year Contributions Added: The employee adds any employer contributions made for the current year after the Form W-2 was issued (because it was contributed by the current-year tax filing deadline).

Potential Complications:

• Employees who have already filed their individual tax return (Form 1040) prior to receiving notice of the additional HSA contribution attributable to that prior year (the tax-filing year) may have to amend their individual tax return (Form 1040-X) to reflect the additional contribution on the Form 8889.

• Employees may argue that they should receive some form of lost earnings compensation for the duration of the failure. Although there are no specific rules addressing this (unlike, for example, the EPCRS lost earnings rules that apply in the 401(k) context), employers might consider accommodating such a request. Any such adjustment should generally be made outside the HSA (i.e., as standard taxable compensation) to avoid the potential for excess HSA contributions.

Example:

• Jason works for his employer Treadstone Security, which offers an HDHP plan option to employees.
• Treadstone Security makes a $3,000 employer contribution ($125 per payroll period) for employees who enroll in the HDHP.
• Upon review of his 2023 Form W-2 in February 2024, Jason discovers that Treadstone Security contributed only $2,875 because it missed one payroll’s HSA contribution.

Result:

• Treadstone Security should correct the mistake by making the missed 2023 employer HSA contribution no later than April 15, 2024.
• Treadstone Security must notify both Jason and the HSA bank that the $125 deposit made in 2024 is to be allocated to the 2023 HSA contribution limit.
• Treadstone Security does not prepare a corrected 2023 Form W-2c for Jason to address the error.
• Instead, Treadstone Security reports the 2023 contribution made in 2024 on Jason’s 2024 Form W-2 provided in January 2025 (aggregated as one amount with the 2024 employer and employee HSA contributions, if any, in Box 12 using Code W).
• Jason will prepare his 2023 Form 8889 to reflect that the additional $125 HSA employer contribution made in 2024 is allocated to the 2023 contribution limit.
• Jason will prepare his 2024 Form 8889 to exclude the $125 additional amount reported on his 2024 Form W-2 that was attributable to the 2023 HSA contribution limit.

Missed Employer HSA Contribution: Prior Year (Correction After 4/15)

In some cases, employers will not discover the missed employer contribution until after the tax filing deadline (generally April 15) has already passed. This unfortunately means that the employer can no longer make the missed contribution attributable to the prior year (i.e., the year in which the employer missed the contribution).

Employers will generally attempt to correct the missed contribution in this situation by simply making the HSA contribution attributable to the current year (i.e., the year of the corrective contribution). However, there are a couple of potential pitfalls to be aware of with this approach:

1. If the employee is no longer HSA-eligible in the current year (e.g., the employee is no longer enrolled in the HDHP), the employer cannot make an HSA contribution for the current year.
2. If the employee remains HSA-eligible in the current year, the extra contribution could cause the employee to either exceed the proportional contribution limit (e.g., if the employee loses HSA eligibility mid-year), or the statutory maximum contribution limit (e.g., if the employee had already set elections to reach the maximum amount for the current year and does not adjust them accordingly).

Nonetheless, making the HSA contribution attributable to the current year is still typically the best option under the circumstances to address the missed contribution if the employee is still HSA-eligible and confirms an understanding of the applicable limits. If the employee had previously made an HSA contribution election designed to meet the statutory maximum, the employee will need to reduce that election going forward by the amount of the employer’s corrective contribution.

Otherwise, the other reasonable alternative would be to provide standard taxable income in the amount of the missed contribution. If still HSA-eligible, the affected employee could choose to use that additional compensation to elect a higher pre-tax HSA contribution election in the current year, which would ultimately create essentially the equivalent result as the current year employer HSA contribution correction approach.

Potential Complications:

• Employees who are no longer HSA-eligible in the current year (e.g., they are no longer enrolled in the HDHP) cannot receive a current year HSA contribution. In this case, employers should consider making the missed payment to the employee as standard taxable cash compensation.
• If the employee has terminated from employment, the HSA account with the employer’s designated custodian may no longer be open. Furthermore, it may be difficult for the employer to ascertain the former employee’s HSA-eligibility status in the current year. Accordingly, in this case employers should consider making the missed payment to the former employee as standard taxable cash compensation.
• Employees may argue that they should receive some form of lost earnings compensation for the duration of the failure. Although there are no specific rules addressing this (unlike, for example, the EPCRS lost earnings rules that apply in the 401(k) context), employers might consider accommodating such a request. If the additional amount is included in the HSA contribution, that will count toward the current year annual contribution limit, potentially requiring the employee to further reduce their HSA contribution election.
• If the employer reported the amount withheld as an HSA contribution on the prior year Form W-2 (Box 12, Code W), the employer would generally need to issue a corrected Form W-2c reflecting the actual amount of HSA contributions for the prior year.

Missed Employee HSA Contribution: Amounts Not Withheld in Payroll

Where an employer discovers that it missed taking one or more employee HSA contributions through payroll, the employer can do one or more “make-up” contributions to bring the employee up to the desired election amount. These corrective contributions could be spread over multiple pay periods or in one lump sum, depending on the situation and potentially the employee’s preferred approach.

• For more details: Correcting Missed Cafeteria Plan Contributions

Employees also have the right to change their HSA contribution election at least once per month for any reason (i.e., without the need to experience a permitted election change event). Arguably, if an employee did not want to make up the missed contribution, an employer could accept the employee’s election to reduce the HSA contribution in a manner designed to address the failure—and thereby avoid making up the missed HSA contributions (or minimize the amount of the make-up repayment).

• For more details: Employee HSA Contribution Election Changes

Alternatively, the employer might consider making a corrective employer HSA contribution in the amount that was inadvertently not deducted in the prior pay periods to compensate for the error and make the employee whole. Although this would typically create potential nondiscrimination issues, it should not present any issues if applied consistently in a corrective context to address bona fide employer errors.

Potential Complications:

• Where employees with missed HSA contributions have already terminated from employment, “make-up” payroll contributions are no longer an option. Accordingly, the best practice is generally to inform the employee of the missed amount so they are aware of the deficit between their intended election balance and the amount actually contributed YTD. Employees can always contribute to their HSA directly (i.e., outside of payroll) and take a deduction on their individual tax return.
• If the calendar year of the missed contribution has closed, the best practice approach would be to inform the employee of the error. That will permit the employee to make a direct contribution to the HSA (i.e., outside of payroll) to address the missed contribution for the prior year by the tax filling deadline (generally April 15). The employer should ensure the employee’s Form W-2 for the prior year accurately reflects the amount of HSA contributions actually made (Box 12, Code W).

Missed Employee HSA Contribution: Amounts Withheld in Payroll

Where an employer discovers that it missed depositing one or more employee HSA contributions that were withheld in payroll, the employer should correct the error by making the deposit as soon as possible.

As a general matter, the employer must “promptly” deposit into the HSA all employee contributions withheld in payroll. The rule of thumb is that the employer must make the HSA deposit as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets, and in no event later than 90 days after the amount is withheld in payroll.

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

• For more details: Employee HSA Contribution Deposit Timing Requirements

Note that in some cases, HSA contributions are not deposited for a longer period because the employee has failed to establish the account with the employer’s designated custodian. This is often because the employee has not completed the Customer Identification Program (CIP) to satisfy requirements set forth in the USA Patriot Act. These situations do not present the same late deposit concerns as long as the employer promptly deposits the contributions when the account is opened (or refunds them pursuant to the employer’s set deadline).

• For more details: Employee Fails to Timely Establish the HSA

Potential Complications:

• Where employees with missed HSA contributions have already terminated from employment, the HSA account with the employer’s designated custodian may no longer be open. In this case, employers should consider refunding the amount withheld to the former employee as standard taxable cash compensation.
• If the calendar year of the missed contribution has closed, the employer should make the HSA deposit by the tax filing deadline (generally April 15) to ensure it is allocated to the prior year contribution limit. This requires that the employer notify the HSA bank and the employee that the contribution is to be allocated to the prior year. See the discussion above for more details.
• If the employer does not discover the missed HSA deposit until after the tax filing deadline (generally April 15), the employer could make a current-year HSA deposit if the employee is still HSA-eligible and is informed of the approach to ensure they avoid excess contributions. Otherwise, if the employee is no longer HSA-eligible (or no longer an employee), the only viable approach generally would be to return the funds as standard taxable income. The employer should ensure the employee’s Form W-2 for the prior year accurately reflects the amount of HSA contributions actually made (Box 12, Code W).

Summary

Employers should act in a timely manner to correct missed HSA contributions in the manner best suited for the specific facts and circumstances. Fortunately, employers discovering missed contributions after the close of the year can still correct by the tax filing deadline—and without the need to correct the prior year Form W-2.

• For more details on everything HDHP/HSA, see our Newfront Go All the Way with HSA Guide.

Relevant Cites:

IRS Notice 2008-59, Q/A-21 :

Q-21. May employer contributions to employees’ HSAs made between January 1 and the date for filing the employee’s return, without extensions, be allocated to the prior year?

A-21. Yes. For employer contributions (including salary reduction contributions) made between January 1 and the date for filing the employees’ federal income tax return without extension, the employer must notify the HSA trustee or custodian if the contributions relate to the prior year. The employer must also inform the employee of the designation. However, the contributions designated as made for the prior year are still reported in box 12 with code W on the employees’ Form W-2 for the year in which the contributions are actually made.

Example. In January 2009, Employer K contributes $500 to each employee’s HSA and notifies the HSA trustee (and provides a statement to the employees) that the contributions are for 2008. Subsequently, in 2009, Employer K contributes $250 to each employee’s HSA on March 31, June 30, September 30 and December 31. For each employee whose HSA received these contributions, Employer K reports a total contribution of $1,500 in box 12 with code W on the Form W-2 for 2009.

In completing the Form 8889 for 2008, to compute Employer K’s contributions, the employees add the $500 to any employer contributions reported in box 12, code W on the 2008 Form W-2. In completing the Form 8889 for 2009, the employees subtract the $500 from the box 12 code W amount on the 2009 Form W-2 and add to the remaining $1,000 any contributions for 2009 made by Employer K between January 1, 2009 and his or her filing date without extensions. See Instructions to Form 8889.

IRS Form 8889 Instructions:

Employer Contributions

Employer contributions (including employee payroll contributions through a cafeteria plan) include any amount an employer contributes to any HSA for 2023. Also, include contributions made by a health insurance plan on an employer's behalf. These contributions should be shown in box 12 of Form W-2 with code W. If either of the following apply, complete the Employer Contribution Worksheet.

• Employer contributions for 2022 are included in the amount reported in box 12 of Form W-2 with code W.

• Employer contributions for 2023 are made in 2024.

…

Employer Contribution Worksheet

1. Enter the employer contributions reported in box 12 of Form W-2, with code W

2. Enter employer contributions made in 2023 for tax year 2022

3. Subtract line 2 from line 1

4. Enter employer contributions made in 2024 for tax year 2023

5. Employer contributions for 2023. Add lines 3 and 4. Enter here and on Form 8889, line 9

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).

The Author

Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.

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