There are specific requirements regarding the timing of deposits into the HSA account.

Question:  What are the requirements for how soon an employee’s HSA contribution through payroll must be deposited in the HSA?

Compliance Team Response:

As a general rule, all employee HSA contributions must be “promptly” deposited into their HSA accounts.  The rule of thumb is that prompt depositing means as of the earliest date in which the contributions can be reasonably segregated from the employer’s general assets, and in no event later than 90 days after the payroll deduction is made.

Failure to timely deposit HSA contributions could raise a potential prohibited transaction under IRC §4975, which creates an excise tax liability of 15% of the amount involved and must be reported on IRS Form 5330.

In some cases, HSA contributions are not deposited for a longer period because the employee fails to establish the account with the custodian.  That’s fine—it shouldn’t cause any potential liability as long as the contributions are deposited promptly after the account is opened (or refunded if not opened by the employer’s deadline).

Regulations:

http://www.dol.gov/ebsa/regs/fab_2006-2.html

Are HSAs subject to the prohibited transaction provisions of section 4975 of the Internal Revenue Code?

Yes. Although the Department believes that HSAs meeting the conditions of FAB 2004-01 generally will not be ERISA-covered plans, the Medicare Modernization Act specifically provided that HSAs will be subject to the prohibited transaction provisions in section 4975 of the Code. In that regard, the Department’s plan asset regulation at 29 C.F.R. § 2510.3-102 states, in relevant part, that “[f]or purposes of [certain specified provisions of ERISA] and section 4975 of the Internal Revenue Code only . . . the assets of the plan include amounts . . . that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.” (Emphasis added). As a result, employers who fail to transmit promptly participants’ HSA contributions may violate the prohibited transaction provisions of section 4975 of the Code. See Code § 4975(c)(1)(D) (prohibited transactions include the “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”).

29 CFR § 2510.3-102(c):

• (c) Maximum time period for welfare benefit plans.

With respect to an employee welfare benefit plan as defined in section 3(1) of ERISA, in no event shall the date determined pursuant to paragraph (a)(1) of this section occur later than 90 days from the date on which the participant contribution amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the date on which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages).