After an abrupt mid-year change, the IRS recently released Revenue Procedure 2018-27, which provides relief for employees with family coverage under a High Deductible Health Plan who also contribute to a Health Savings Account (HSA), by permitting such employees to use the previously announced $6,900 contribution limit for 2018 contributions.
In May 2017, the IRS released Revenue Procedure 2017-37 which provided the annual inflation adjusted contribution limits for HSAs and stated that the 2018 contribution limit for family coverage would be $6,900. However, citing inflation adjustments under the Tax Cuts and Jobs Act, the IRS changed the contribution limit in March 2018 with the release of Revenue Procedure 2018-18, which cut the 2018 HSA family contribution limit from $6,900 to $6,850, (there were no changes to the contribution limit for individual-only HSA contributions).
Following complaints received from employers, industry organizations and trade groups regarding the administrative burden of this mid-year $50 reduction, the IRS has now determined that honoring the previously published limit of $6,900 for 2018 “is in the best interest of sound and efficient tax administration.”
- To the extent that employees with family coverage have made 2018 contributions to their HSA that exceed $6,850 but not $6,900 and vendors have adjusted for the revised limit, these amounts can remain in the employee’s HSA and no further action is needed.
- Employees that have already withdrawn “excess contributions” (with earnings) from their HSA due to the mid-year change, can either repay the amount to the HSA (if permitted by the employer and the custodian) or keep the withdrawn amount. Any repaid amount (plus interest) will not be included in the employee’s income and no additional reporting is required.
- If the employee decides not to repay the withdrawn amount the tax treatment will depend upon whether the contributions were made through a cafeteria plan on a pre-tax basis. If the withdrawn contributions were attributable to employer contributions (including employee contributions made on a pre-tax basis pursuant to a cafeteria plan election) and the employer does not include the $50 in wages (because it treats $6,900 as the annual limit for 2018)the withdrawn amounts will be included in income and be subject to excise tax unless used to pay qualified medical expenses. Alternatively, if an employee who made contributions outside of a cafeteria plan chooses not to repay the withdrawn amount to the HSA, no IRS penalty or excise tax will apply and this excess distribution amount will not be included in income.
- Employers should ensure that their employees, payroll and human resources staff, and service providers are all aware of the latest changes to the HSA contribution limit.