H&W: 2018 HSA Deduction Limit for Family Coverage

Back in May of 2017, the Department of the Treasury and the Internal Revenue Service released inflation adjustments for HSAs for the 2018 calendar year.  At that time, the rules for calculating these annual adjustments determined that the HSA contribution limit for individuals with family coverage under a high deductible health plan was to be $6,900.

However, in December of that same year, the “Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” changed the way the annual inflation adjustments were to be calculated.  Therefore, per Internal Revenue Bulletin 2018-10, the original calculation that resulted in the $6,900 contribution limit, was recalculated resulting in a revised contribution limit of $6,850 for individuals with family coverage under a high deductible health plan.  This new limit was announced in March of this year.

After this announcement, many complaints ensued stating that this $50 reduction in the limit would cause many unanticipated administrative and financial burdens.

“Specifically, stakeholders noted that some individuals with family coverage under an HDHP made the maximum HSA contribution for the 2018 calendar year before the issuance of Rev. Proc. 2018-18 reducing the deduction limitation, and that many other individuals made annual salary reduction elections for HSA contributions through their employers’ cafeteria plans based on the $6,900 limit for an individual with family coverage under an HDHP. Further, stakeholders informed the Treasury Department and the IRS that the costs of modifying the various systems to reflect the reduced maximum, as well as the costs associated with distributing a $50 excess contribution (and earnings), would be significantly greater than any tax benefit associated with an unreduced HSA contribution (and in some instances may exceed $50). Some stakeholders also pointed to section 223(g)(1), which requires annual inflation adjustments for HSAs to be published by June 1 of the preceding calendar year, as another indication that a current year change would be unduly burdensome.”

So after considering these complaints the Treasury Department and the IRS have decided to allow the original contribution limit of $6,900 which was published in Rev. Proc. 2017-37.

Because of the lowered limit that was announced in March, taxpayers may have set about correcting a $50 excess contribution.  Rev. Proc. 2018-18 also addresses this situation and states that an individual who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit published in Rev.Proc.2018-18 may repay the distribution to the HSA and treat the distribution as the result of a mistake of fact due to reasonable cause.  Accordingly, the portion of a distribution (including earnings) that an individual repays to an HSA by April 15, 2019, will not be included in the individual’s gross income and the repayment will not be subject to the excise tax on excess contributions.

Alternatively, an individual who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit published in Rev. Proc. 2018-18 and does not repay the distribution to the HSA may treat the distribution as excess contributions returned before the due date of return.