IRS Restores $6,900 HSA Family Contribution Limit for 2018

On April 26, 2018, the IRS granted much needed relief to taxpayers by allowing the family-coverage health savings account (HSA) contribution limit of $6,900 that was originally released on May 4, 2017, to remain in effect for 2018 (Rev. Proc. 2018-27). In earlier guidance released on March 5, 2018 (Rev. Proc. 2018-18), the family HSA contribution limit was reduced from $6,900 to $6,850. This action created an uproar among stakeholders, who informed the Treasury Department and the IRS that implementing the $50 reduction would impose numerous, unanticipated administrative and financial burdens. Due to these concerns, the IRS conceded. Plan sponsors should update their payroll systems to reflect the adjusted limit and modify their employee education materials.    

An individual who received a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 contribution limit may repay the distribution to the HSA and treat the distribution as a mistake of fact due to reasonable cause, under Q&A-37 of IRS Notice 2004-50. The portion of the distribution (including earnings) that is repaid to the HSA by April 15, 2019, is not included in the participant’s taxable income, nor is it subject to a 20% penalty or 6% excise tax on excess contributions. Furthermore, mistaken distributions repaid are not required to be reported on Form 1099-SA or Form 8889 and are not required to be reported as additional HSA contributions. However, the trustee or custodian has discretion as to whether individuals are allowed to repay mistaken distributions, in accordance with Q&A-76 of IRS Notice 2004-50.  

If an individual receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 contribution limit and does not repay the distribution to the HSA before April 15, 2019, the excess contribution would not be included in taxable income, nor would it be subject to the 20% penalty, provided the distribution is received on or before the last day (including extensions) for filing the individual’s 2018 tax return.  

The tax treatment described in the preceding paragraph does not apply to distributions from an HSA that relate to pre-tax employee contributions through a cafeteria plan or employer contributions if these amounts are not included in wages on the individual’s Form W-2. Unless the distribution is used to pay qualified medical expenses, it is taxable and subject to a 20% penalty. 

The following is an updated chart for the HSA limits.

Individuals who participate in an HDHP are permitted a deduction for contributions to HSAs set up to help pay the medical expenses of the participant, spouse and/or dependents. To be eligible to contribute to an HSA, individuals must participate in an HDHP, which is defined as a health plan with an annual deductible that is not less than the minimum deductibles noted above, and for which the annual out-of-pocket expenses — including deductibles, copayments and other amounts but excluding premiums — does not exceed the out-of-pocket maximum annually. In addition, individuals may not receive benefits from other health plans that would be construed as impermissible coverage, such as a general-purpose health flexible spending account, certain prescription drug benefits, etc. The limits noted above are subject to an inflation adjustment each year.

For a helpful HSA summary, click here. Also, be sure to read our article on how HSAs can be an employee benefit cost-saving measure.

If you have any questions, or for more information about the 2018 HSA cost-of-living adjustments, we encourage you to contact Tom Krieg, Bob Buss, Marci Boyarski, Angie Whiteside, or your Wipfli relationship executive.