Pub. 14 2019-2020 Issue 3

WWW.NEBANKERS.ORG 28 returned to the bakery before the end of its 2019 tax year, the bakery does not have to include the $500 excess on Ted’s 2019 Form W-2. An employer may recover contri- butions in other situations as well. In the past, an employer’s ability to recoup HSA contributions was be- lieved to be limited by the guidance contained in IRS Notice 2008-59. Then in late 2018, the IRS released Information Letter 2018-0033, which contains an expanded list of circumstances under which an employer may recoup HSA contri- butions transmitted to a custodian or trustee. Mistaken Distributions A mistaken distribution occurs when anHSA owner takes a distribu- tion to pay for what she mistakenly believes is a qualified medical ex- pense. The HSA owner may “correct” themistake by returning the distrib- uted assets to the HSA and acting as if the distribution had not occurred. Your organization is not required to accept returns of mistaken dis- tributions. IRS Notice 2004-50 explains that financial organizations that do acceptmistaken distributions may rely on the HSA owner’s repre- sentation that the distribution was a mistake. The deadline for repaying a mistaken distribution is April 15 fol- lowing the first year the HSA owner knew or should have known that the distribution was a mistake. Example: On May 9, 2019, Fred Jones takes a $200HSA distribution to pay for a pair of prescription sun- glasses. Fred later finds out that he did not need to take anHSA distribu- tion because prescription sunglasses are covered under his vision plan. Fred is reimbursed by his insurance company on July 1, 2019. He then asks tomove $200 fromhis checking account into his HSA at ABC Bank. ABC Bank accepts the return of the mistaken distribution and moves $200 into Fred’s HSA. ABC Bank does not report the $200 distribu- HSA Transactions — continued from page 27 Jennifer Bassett is a Senior Editor in the ERISA department at Ascensus. As a Senior Editor, Jennifer contributes to many of Ascensus' printed and online publications, education materials, and client communications. Since joining Ascensus in 2004, Jennifer has specialized in various employer- sponsored retirement plans, Traditional and Roth IRAs, health savings accounts, and Coverdell education savings accounts. She also answers client inquires through Ascensus' 800 Consulting service. tion on the 2019 IRS Form 1099-SA and instead uses a nonreportable transaction code—i.e., a transfer code—to deposit the $200 into the HSA. Note that in the case of a mistaken dis- tribution that has already been reported on Form 1099-SA, the financial organization should issue a corrected Form 1099-SA. Possible Nonreportable Transactions Fraudulent Transactions: Like other types of accounts, HSAs can be a target for fraudulent activity. Clients may suddenly find themselves unsus- pecting victims of illegal, unauthorized transactions. Because the IRS has yet to release official guidance on this issue, your organization should create and fol- low its own internal procedures for han- dling fraudulent HSA transactions. When fraudulent activity occurs, make sure your organization’s legal counsel is aware of the issue and agrees with any steps taken after the activity is identified. Example: In February 2019, Piper Smith’s HSA debit card was stolen and $900 was illegally taken from her HSA. In August 2019, Piper was reimbursed for the money that was stolen from her HSA. She asks Greenway Bank to redeposit $900 into her HSA. After gathering proof (such as police reports, account activity reports) that $900 was illegally taken from Piper’s HSA, Greenway Bank’s legal counsel and management agree to use a nonreportable transaction code to deposit themoney back into Piper’s HSA. The bank also suppresses the distribution reporting. Greenway Bank will keep detailed notes—including steps taken to verify that the money was illegally distributed—in Piper’s HSA file. 