What does an employer do when an employee fails to open an HSA?

If an employer offers an HSA, the employer should create an administrative policy addressing situations for both active and terminated employees who fail to open an HSA with the employer’s bank/custodian. Contributions can be made to an HSA until the due date of the individual's federal tax return related to that same year. This means for 2019 contributions, individuals can contribute to their HSA until April 15, 2020. Since employers can contribute to an individual’s HSA on their behalf, that rule includes both employer and employee/individual HSA contributions. So, either the individual or the employer on their behalf can make up 2019 contributions until April 15, 2020. Thus, if someone fails to establish their HSA In a timely fashion, they could still contribute to it for 2019 up until the tax filing deadline. Now, while employer HSA contributions don't have a particular due date, the employer should follow the plan terms. For example, if an employer tells employees that employer contributions will be deposited once per month or at the beginning of the plan year, the employer should contribute based on that time frame. And again, the IRS allows employers to contribute to employees' HSAs until the tax filing deadline for the year in which the contributions were due. However, participant contributions withheld from an employee’s paycheck, including employee HSA contributions, are subject to the DOL's plan asset rules which govern welfare benefits. Specifically, participant contributions become plan assets "as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets, but in no event later than 90 days after the payroll deduction is made." This means the outside limit for depositing HSA contributions is 90 days, but should really be made in matter of days. So, based upon this information, here are some general guidelines on how to handle employee contributions and employer contributions when an employee fails to establish an HSA: For employee contributions: when an active or terminated employee fails to open an HSA but has elected salary reductions for HSA contributions, the employer should return all of the employee’s payroll deductions back to the individual. Any refund must be counted as taxable income, subject to withholding and payroll taxes. Ideally this should be done within 90 days or sooner, hence the need for a clear policy. For example, a policy could say that failure to open the account within 60 or 90 days (or during the period of employment, if sooner) will result in a refund to the employee in the following payroll.  This avoids the need to hold and potentially refund large amounts of employee contributions, which potentially violate plan asset rules. For employer contributions- it is also reasonable to adopt a policy that says employees forfeit any employer contributions if they fail to establish an HSA account in a timely fashion. For example, a policy could state that there will be no retroactive contributions after the last day of February of the next year. And if the account isn’t opened during the period of employment and someone terminates, then all employer contributions are forfeited. But again, this should be a formal policy that the employer communicates to employees to avoid any misunderstandings. Therefore, a best practice is to adopt a consistent policy to address situations for both active and terminated employees who do fail to open an HSA with the employer’s bank/custodian. Then, the employer should communicate the policy during open enrollment and upon hire. Furthermore, some HSA vendors impose specific timeframes for returning funds upon failure to establish an account, so employers should ensure the policy aligns with the custodian’s default procedures.