Can an Employer Take Back HSA Contributions?

Health Savings Accounts (HSAs) offer a tax-advantaged way for individuals to save and pay for healthcare expenses. Employers frequently contribute to these accounts as part of their benefits packages. A common question arises regarding whether employers can reclaim contributions. This article explores the nature of employer HSA contributions and the conditions under which corrections may occur.

Understanding Employer HSA Contributions

Employer contributions to an employee’s Health Savings Account are generally considered irrevocable once deposited. These funds become the property of the individual employee, emphasizing that the HSA is owned by the individual, not the employer. This individual ownership means the money in an HSA is portable and remains with the employee even if they change jobs or retire.

Contributions offer tax advantages. For the employer, contributions may be tax-deductible business expenses. For the employee, contributions made through payroll are typically excluded from gross income and are not subject to federal income tax, Social Security, or Medicare taxes. Funds within an HSA can grow tax-free, and withdrawals for qualified medical expenses are also tax-free. To be eligible for an HSA, an individual must be covered under a high-deductible health plan (HDHP) and meet other specific criteria, such as not being enrolled in Medicare or being claimed as a dependent on someone else’s tax return.

Correcting Employer HSA Contributions

While employer HSA contributions are generally irrevocable, specific, limited scenarios allow an employer to correct or reclaim funds. The Internal Revenue Service (IRS) provides guidance for these situations, which are typically required to maintain the account’s tax-advantaged status. These corrections aim to put all parties in the position they would have been in had the error not occurred.

One primary reason for correction is an administrative or process error. This includes instances where an employer mistakenly contributes too much, deposits funds into the wrong employee’s account, or transmits duplicate payroll files. If clear documentary evidence shows such an error, the employer may request the HSA custodian to return the amounts. This applies to situations like an incorrect amount being withheld and deposited.

Another scenario involves employee ineligibility. If an employee was never eligible for an HSA at the time of the contribution—for example, not covered by a qualifying HDHP, enrolled in Medicare, or claimed as a dependent—the employer can request the return of the funds. Similarly, if the employer’s contribution, combined with the employee’s, exceeds the annual IRS contribution limits, the employer may correct the overcontribution. For 2025, the maximum contribution is $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution for those age 55 and over.

Employee Responsibilities for Corrected Contributions

When an employer corrects an HSA contribution, employees have certain responsibilities, particularly concerning their tax obligations. If funds are reclaimed due to the employee’s ineligibility or an overcontribution, the employee may need to adjust their tax filings. For example, if an employer fails to recover excess contributions, those amounts may need to be included as gross income on the employee’s Form W-2 for the year the contributions were made. This might necessitate a corrected Form W-2c from the employer.

If an excess contribution remains in the HSA, it is generally subject to income tax and an additional 6% excise tax each year until corrected. To avoid penalties, employees must remove excess contributions and any attributable earnings by the tax filing deadline of the year the contribution was made. This corrective distribution is reported on Form 8889. Employees should communicate with their employer and HSA custodian to understand the specific nature of the correction and any required actions, including receiving corrected tax forms such as Form 1099-SA from the custodian.

HSA Funds After Employment Changes

A Health Savings Account’s portability means the account and its funds belong to the individual, even after leaving an employer. This individual ownership ensures that all contributions, including those made by the employer, as well as any investment growth, remain with the employee. The funds do not expire and can be used for qualified medical expenses at any time, regardless of current employment status or health insurance coverage.

Upon changing jobs, an employee has several options for managing their HSA:
Leave the funds with the existing HSA custodian.
Transfer the funds to a new HSA offered by a new employer.
Roll them over to a new HSA provider.

While the funds remain accessible, the ability to make new contributions depends on continuing to be enrolled in an HSA-eligible HDHP. If the new health plan is not an HDHP, contributions cannot be made, but the existing funds can still be used for qualified medical expenses.