The problem is that you were not eligible to receive an HSA contribution in December 2016, because you were not in an HDHP on December 1, 2016.
To quote the IRS on eligibility:
"To be an eligible individual and qualify for an HSA, you must meet the following requirements.
- You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage except what is permitted under Other health coverage, later.
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone else's 2016 tax return."
See IRS Publication 969 at https://www.irs.gov/pub/irs-pdf/p969.pdf.
While you are principally responsible for determining your eligibility for HSA contributions, your employer has the responsibility to ensure that you are covered by an HDHP. Well, you were on December 28, 2016, but the employer should have reasonably known that you couldn’t be eligible for the HSA until January 1, 2017.
IRS Notice 2004-50 -
“Q-81. Are employers who contribute to an employee’s HSA responsible for determining whether the employee is an eligible individual and the employee’s maximum annual contribution limit?
A-81. Employers are only responsible for determining the following with respect to an employee’s eligibility and maximum annual contribution limit on HSA contributions: (1) whether the employee is covered under an HDHP (and the deductible) or low deductible health plan or plans (including health FSAs and HRAs) sponsored by that employer; and (2) the employee’s age (for catch-up contributions). The employer may rely on the employee’s representation as to his or her date of birth.”
Clearly, you weren’t covered on December 1st, so I suggest that you visit the HR department and ask them why they made the contribution on December 28, 2016, instead of waiting 4 days until 2017 when it would have been OK.
Hopefully, they will find a way to recharacterize their contribution to year 2017 or some other accounting mechanism to relieve you of the penalty.
