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FAQs
HSA
Question: We just received notification that a Health Savings Account owner died. What should we do with the account?
Answer: When receiving notification of an HSA owner’s death, your bank should obtain a copy of the death certificate, stop any automatic contributions or distributions associated with the account, and then review the current beneficiary designation form to determine who is the appropriate beneficiary. If there is no beneficiary designation form on file, then you will need to defer to your HSA plan agreement to determine the named default beneficiary within the document. As always, be sure to follow your organization’s policies and procedures for this situation should it arise, and ensure that you are adhering to the IRS rules when distributing assets to your beneficiary.
Question: We have a health savings account (HSA) owner requesting that we issue a HSA debit card to his wife. The HSA is set up in the HSA owner’s name. May we issue a HSA debit card to his wife if she is not listed on the account as an owner?
Answer: Yes. The IRS provided guidance in Notice 2008-59 stating that “although an HSA is an individual account, an HSA account beneficiary can designate other individuals to withdraw funds pursuant to the procedures of the trustee or the custodian of the HSA.”
If your bank chooses to allow the HSA owner to authorize someone else to withdraw from his HSA, then as the trustee or custodian of the HSA, you can set the rules surrounding account access by other individuals. For example, you could allow authorized users to access the account only by use of a debit card, rather than checks or over-the-counter transactions. And if your bank has a policy not to issue debit cards to anyone under age 18, your bank can apply the same policy to HSA debit card issuance.
The risk is that the HSA owner may incur negative tax consequences when authorized users make withdrawals that are not used for qualified medical expenses. Also, should an authorized user engage in a transaction that causes an overdraft in the HSA, the transaction may be viewed as a prohibited transaction and the account would cease to be an HSA.
Banks permitting authorized users are encouraged to add provisions to their authorized user agreements in which the HSA owner acknowledges that she/he assumes liability for all transactions on the account, even transactions made by authorized users. The agreements should also provide a process for the HSA owner to revoke an authorized user’s access to the account, allowing sufficient time for the bank to act on the request.
Question: If a customer uses a debit card connected with his or her HSA account and makes a transaction that overdraws the account, what should or can the bank do?
Answer: The Treasury issued guidance on this in Notice 2008 found online at https://www.treasury.gov/press-center/press-releases/Documents/notice200859.pdf. HSA Custodians or Trustees may not extend credit, either directly or indirectly, to an HSA account holder; doing so is considered a “prohibited transaction” under the IRS rules. See Q&A 34–37 of the IRS FAQ in the Notice 2008.
If an account beneficiary engages in a prohibited transaction with his or her HSA, the sanction, in general, is disqualification of the account. Thus, the HSA stops being an HSA as of the first day of the taxable year of the prohibited transaction. The assets of the beneficiary’s account are deemed distributed, and the appropriate taxes, including the 10 percent additional tax under § 223(f)(4) for distributions not used for qualified medical expenses, apply.
Some banks attach a credit card to an HSA to cover inadvertent overdrafts. Others simply prohibit overdrafts. It’s left up to the institution to decide and the technical platforms can accommodate either path.
Question: One of our HSA (Health Savings Accounts) customers reported their debit card was stolen and an unauthorized transaction occurred. We handled the unauthorized transaction in accordance with Reg. E’s error resolution processes and provided credit back to the customer for the unauthorized transaction but now are unsure how to handle the IRS tax reporting.
Answer: Like other types of accounts, HSAs can be a target for fraudulent activity. Clients may suddenly find themselves unsuspecting victims of illegal, unauthorized transactions. Because the IRS has yet to release official guidance on this issue, banks are left to create and follow their own internal procedures for handling fraudulent HSA transactions. When fraudulent activity occurs, make sure your bank’s legal counsel is aware of the issue and agrees with any steps taken after the activity is identified.
For example, in February 2019, Customer Smith’s HSA debit card was stolen and $900 was illegally taken from her HSA. In May 2019, Customer Smith was reimbursed for the money that was stolen from her HSA. She asks the bank to redeposit $900 into her HSA. After gathering proof that $900 was illegally taken from the HSA, the bank’s legal counsel and management agree to use a non-reportable transaction code to deposit the money back into the HSA. The bank also suppresses the distribution reporting. The bank will keep detailed notes — including steps taken to verify that the money was illegally distributed — in the HSA file. (November 2019)
Question: Our bank is reviewing accounts for escheatment purposes and we have one Health Saving Account (HSA) that has had no transactions for three years. The customer has no other accounts with us. Is this account subject to escheatment this year and if so, what transaction code should be used for the withdrawal?
Answer: First, remember inactivity on an account does not always mean an account has been abandoned by its owner and needs to be escheated to the State. An account is considered “abandoned” when the bank has lost all contact with account owner; typically mail is being returned as undeliverable with no forwarding address, the phone number on file at the bank is no longer active, etc.
If this account is truly abandoned, the question becomes when to start the abandonment period for purposes of escheating the funds to the State. The Financial Institution Reporting Manual on the Iowa State Treasurer’s website does not directly address HSAs. As a result, the IBA contacted the Iowa State Treasurer’s office for guidance. The Treasurer’s office indicated since both HSA and Individual Retirement Accounts (IRA) are found under the same code section (556.7 – Property held by fiduciaries), both would be treated the same for escheatment purposes. The Financial Institution Reporting Manual states “an IRA is reportable as unclaimed property if the owner fails to take a distribution as required by either agreement governing the account or the Internal Revenue Code.” For IRAs, this is typically when the accountholder turns age 70.5 (or 72 as applicable) or upon death of the owner. Therefore for IRAs the abandonment period is three years, starting from the required beginning date of distribution or date of death. The manual acknowledges while Roth IRAs are not subject to the mandatory distribution rules during the original owner’s lifetime, for purposes of consistency, the State Treasurer’s office will not penalize reporting organizations for treating the Roth IRA in the same manner as the traditional IRA and reporting them three years after the owner reaches the age of 70.5 (or 72 as applicable).
So, following the State Treasurer’s guidance to use the treat HSAs in the same manner as IRAs, if the HSA accountholder is still living and has not attained this 70.5 (or 72 as applicable), the abandonment period has not yet begun and the account balance should not be escheated to the State. (October 2019)
Question: We had an HSA (Health Savings Account) owner contact the bank indicating he made a mistaken distribution from his HSA account. His tax advisor told him he could “correct” the mistake by returning the distributed assets to the HSA and acting as if the distribution had not occurred. How do we handle tax reporting of the mistaken distribution and correction of it?
Answer: Your organization is not required to accept returns of mistaken distributions.
IRS Notice 2004-50 explains that financial organizations that accept mistaken distributions may rely on the HSA owner’s representation that the distribution was a mistake. The deadline for repaying a mistaken distribution is April 15 following 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 $200 HSA distribution to pay for a pair of prescription sunglasses. Fred later finds out that he did not need to take an HSA distribution because prescription sunglasses are covered under his vision plan. Fred is reimbursed by his insurance company on July 1, 2019. He then asks to move $200 from his 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 distribution on the 2019 IRS Form 1099-SA and instead uses a non-reportable transaction code — i.e., a transfer code — to deposit the $200 into the HSA.
Note, if you have already reported the distribution on Form 1099-SA, issue a corrected Form 1099-SA. (October 2019)