HSA and penalities

[Lindy2014]

I am signed up for an HDHP with an HSA. The HDHP coverage is not effective until June 1. I set up the HSA, sent my payroll person the information to set up the account and the pay date on which to start deducting from my paycheck. She set it up for the last pay in May instead.

My understanding on HSA's are that we cannot contribute to them prior to 1) the date the HDHP is goes in effect and/or 2) the 1st of the month following the HSA setup (regardless of when the HDHP went in effect.) I contacted the bank's HSA customer service and they didn't know if I would incur penalties and told me I should contact a tax adviser (which I don't want to spend money on - more than the amount contributed to my account.) Does anyone know about penalties related to this? Or would I not get penalized unless I tried to withdraw funds from the account prior to my effective date?

I can ask that she withdraw the funds and then start again on the next pay, but it would be a wash. But there would be a "paper trail" so to speak to show the correction. If this doesn't need to be done or would be a waste of time, I'd don't want to waste her time.

Hope that all makes sense.

 

[LdiJ]

I am signed up for an HDHP with an HSA. The HDHP coverage is not effective until June 1. I set up the HSA, sent my payroll person the information to set up the account and the pay date on which to start deducting from my paycheck. She set it up for the last pay in May instead.

My understanding on HSA's are that we cannot contribute to them prior to 1) the date the HDHP is goes in effect and/or 2) the 1st of the month following the HSA setup (regardless of when the HDHP went in effect.) I contacted the bank's HSA customer service and they didn't know if I would incur penalties and told me I should contact a tax adviser (which I don't want to spend money on - more than the amount contributed to my account.) Does anyone know about penalties related to this? Or would I not get penalized unless I tried to withdraw funds from the account prior to my effective date?

I can ask that she withdraw the funds and then start again on the next pay, but it would be a wash. But there would be a "paper trail" so to speak to show the correction. If this doesn't need to be done or would be a waste of time, I'd don't want to waste her time.

Hope that all makes sense.

How much money are we talking about?

 

[Lindy2014]

About $500. With respects to penalties and such, I don't think it would be much -- just don't want to pay for a mistake by the company.

 

[swalsh411]

You have nothing to worry about. Your 2013 W-2 will show total contributions for the year (Box 12 Code W). There is no way the IRS could possibly know you started to contribute a week or two early. It's just not reported by date. There is also nothing on form 8889 (which you will complete for your 2013 taxes) that has anything to do with the date the payroll deduction started.

 

[Lindy2014]

Awesome! Thanks for the quick reply!

 

[davew128]

You have nothing to worry about. Your 2013 W-2 will show total contributions for the year (Box 12 Code W). There is no way the IRS could possibly know you started to contribute a week or two early. It's just not reported by date. There is also nothing on form 8889 (which you will complete for your 2013 taxes) that has anything to do with the date the payroll deduction started.

Assuming the company doesn't end up having a payroll tax audit.

 

[Lindy2014]

Would the employee be on the hook too if they didn't know? Based on the conversation with my payroll person, I suspect they've deducted funds early quite a bit (mostly starting the deduction prior to the 1st of the following month.)

 

[LdiJ]

Would the employee be on the hook too if they didn't know? Based on the conversation with my payroll person, I suspect they've deducted funds early quite a bit (mostly starting the deduction prior to the 1st of the following month.)

The odds of a payroll tax audit are very very slim...and even then, what they would be looking for is not HSA contributions that were a couple of weeks early.

 

[cbg]

Does the last pay period in May contain June 1, which is a Saturday?

Keep in mind that even though you may work Monday through Friday, the legal workweek, for wage and salary purposes, contains Saturdays and Sundays as well.

If, for example, the pay period is Sunday, May 19 through Saturday, June 1, then it is both legal and appropriate to start the HSA in that pay period.

 

[swalsh411]

Assuming the company doesn't end up having a payroll tax audit.

A) The chance of that is very slim unless there is something else fishy going on that has caught the eye of the IRS.

B) Even if they did audit, they would almost certainly not be looking at every payroll register to make sure no employees contributed early.

C) Even if they did discover this minor error, the employee would not be responsible.

The purpose of an IRS audit is to recover revenue, not get out a microscope and look at every little detail.

 

[Lindy2014]

You all are awesome! I called the HSA customer service at the bank where my HSA account is (along with a few other banks) and they couldn't tell me jack. I really appreciate all of the input.

 

[davew128]

A) The chance of that is very slim unless there is something else fishy going on that has caught the eye of the IRS.

B) Even if they did audit, they would almost certainly not be looking at every payroll register to make sure no employees contributed early.

C) Even if they did discover this minor error, the employee would not be responsible.

The purpose of an IRS audit is to recover revenue, not get out a microscope and look at every little detail.

The IRS doesn't generally administer payroll audits, the states do as a proxy. As a tax professional, the duty is to do it right, not "even if they look they won't see it". That standard went out years ago.

 

[LdiJ]

The IRS doesn't generally administer payroll audits, the states do as a proxy. As a tax professional, the duty is to do it right, not "even if they look they won't see it". That standard went out years ago.

Dave, come on...that kind of thing simply isn't what they audit for. I have been through payroll audits with clients and they just don't audit for that. There isn't enough money involved to make it worth their while.

 

[swalsh411]

The IRS doesn't generally administer payroll audits, the states do as a proxy. As a tax professional, the duty is to do it right, not "even if they look they won't see it". That standard went out years ago.

I never said it was OK to start the deduction earlier than it was supposed to. (if that is what happened). I said the OP had nothing to worry about.

 

[Lindy2014]

the duty is to do it right, not "even if they look they won't see it".

I agree with this as I'm kind of stickler on policies/regulations. Going forward, we are going to have this administered correctly. There isn't anything I can do about prior mistakes (and glad to know it wouldn't likely be caught in an audit), but will make sure it is explained to all new employees and to our payroll person to avoid future issues.