In follow up to our earlier post in March regarding the HSA Maximum Family Contribution change, we want to provide some new information based upon an IRS Revenue Procedure released April 26, 2018.
Background: The maximum contribution to a Health Savings Account (HSA) for family coverage was originally announced as $6,900 on May 4, 2017. On March 2, 2018, the limit was reduced to $ 6,850 for taxpayers with family coverage under HDHPs due to the change to the inflation calculator under Tax Reform legislation for 2018 and future years.
While attending the Employer Council on Flexible Compensation (ECFC) Annual Conference in Washington, D.C. in March of this year, Employee Benefits Corporation along with our industry peers shared with the IRS the difficulties related to changing the HSA family maximum contribution amount for a year that has already started. The IRS listened to stories of the administrative burden imposed on individuals in order to make these $50 plus earnings adjustments. They indicated that they were currently considering if they can extend some transition relief on the matter.
New Information: In a reverse of the March announcement of the reduction of the family contribution level to the HSA, the IRS released Revenue Procedure 2018-27 on April 26, 2018, providing relief for taxpayers with family coverage under high deductible health plans (HDHPs) for 2018. This guidance allows taxpayers to continue to treat the 2018 limit as $6,900.
The IRS provided clarifications on how taxpayers who already received a distribution from an HSA of an excess contribution based on the $6,850 deduction limit may treat the distribution as a mistake and repay the HSA without any tax or reporting consequences. The IRS also clarifies how to treat a distribution of an excess contribution (and earnings) based on the $6,850 deduction limit. An individual may elect to repay any excess distribution and earnings to an HSA by April 15, 2019 and will not be subject to income tax, 20% penalty for non-qualified distribution, or any excise tax on excess contribution.
However, if the HSA contributions were made through a cafeteria plan and the employer does not include any portion of the contributions in the employee’s wages because the employer treats $6,900 as the annual limit, the excess distribution must be used to pay for qualified medical expenses to avoid income taxes and the 20% penalty.
The employer is allowed to correct a mistaken contribution that exceeds the statutory maximum for the year. So what that means is if the employer prior to this transition relief, processed a reversal of $50 cafeteria plan deposit based upon what was thought to be in excess of the $6,850 statutory max and returned the amount to employees as taxable income, it would be possible for the employee to contribute the additional $50 pre-tax for 2018 now that the $6,900 contribution limit has been restored.
We will continue you to provide any additional HSA updates. Watch for the release of the 2019 limits which are due out before June 1, 2018.