IRS Releases Two Letters Concerning HSAs and HDHPs

On June 25, 2021, the IRS released two information letters responding to the inquiries regarding whether the HSA excessive employer contribution error can be corrected and what amounts are counted toward the minimum annual deductible for an HDHP when a discount, rebate or coupon was provided for healthcare services or products. (Letters 2021-0008 and 2021-0014)

The first letter (2021-0008) addresses situations when an employer made excessive contributions to an employee’s HSA beyond the annual HSA contribution limit, as well as when an HSA custodian failed to provide a corrected Form 5948-SA.

The letter reminds that when an employer contributes more than the annual limit to an employee’s HSA inadvertently, the employer may correct the error. Specifically, at the employer’s option, the employer may ask the custodian to return the excess amount to the employer. If the employer does not recover the excess amount, the employer must include the amount on the employee’s Form W-2 as wages for the year the employer made contributions. Though it was not described in the letter, keep in mind that the excess contributions and net income attributable to such excess contributions need to be returned before the account holder’s federal income tax return filing deadline (including extensions) in order to avoid the 6% excise tax. (Reference: IRS Notice 2008-59, Q&A-24).

The letter also advises that the account holder should contact the custodian to obtain a corrected Form 5948-SA. As a reference, while taxpayers should keep a copy of Form 5498-SA, Form W-2 also shows HSA contributions. It also states that HSAs may be governed by ERISA and that the account holder may contact the DOL for information about applicable fiduciary responsibilities.

The second letter (2021-0014) responds to an inquiry about the benefits that can be provided by an HDHP before the minimum annual deductible is satisfied as well as the interaction of copay accumulator rules with the HDHP requirements. The letter reminds that an individual covered by an HDHP who also has a discount card, rebate or coupon for healthcare services or products, may still contribute to an HSA provided that the individual is required to pay the costs of the covered healthcare until the minimum annual deductible for the HDHP is satisfied. As an example, the letter states that if a manufacturer’s discount (including a rebate or coupon) reduces a drug’s cost from $1,000 to $600, the amount that may be credited toward satisfying the HDHP deductible is $600, not $1,000. (Reference: IRS Notice 2004-50, Q&A-9).

The letter also reiterates that HDHPs may not provide benefits other than for preventive care until the minimum deductible for that year is satisfied. The eligible “preventive” care is determined under Section 223, and state-law mandates do not change the outcome. For example, some states mandate male contraception and sterilization services. However, the letter affirms the previous guidance that state mandated benefits that are not included in Section 223 is not considered preventive for the purpose of an HDHP. (Reference: IRS Notice 2018-12).

Though these information letters provide helpful reminders of the existing rules, they do not outline the comprehensive guidance. The readers are recommended to verify any specific situation with the IRS Notices referenced in this section or consult with the legal or tax advisor.

IRS Letter 2021-0008 »
IRS Notice 2021-0014 »