Individuals with family coverage under a high-deductible health plan (HDHP) can once again contribute up to $6,900 to their health savings account (HSA) in 2018. This change comes after the Internal Revenue Service (IRS) had already made an unprecedented mid-year change that left taxpayers, employers, and administrators scratching their heads.
Third time’s the charm?
The 2018 maximum-deductible HSA contribution limit went from $6,900 to $6,850, and back to $6,900. Here’s how the chain of events unraveled:
- May 4, 2017: In typical preparation for the upcoming tax year, the IRS announced in Revenue Procedure 2017-37 that the 2018 family-coverage HSA contribution limits were $6,900 for taxpayers under an HDHP. Under the change, impacted taxpayers could contribute $150 more than in 2017 (up from $6,750).
- March 2, 2018: When the inflation-adjustment calculations for 2018 changed in accordance with the Tax Cuts and Jobs Act, the IRS announced in Revenue Procedure 2018-18 that contribution caps were $6,850, not $6,900. This unprecedented curveball was not well received.
- April 26, 2018: In Revenue Procedure 2018-27, the IRS announced that affected taxpayers could more or less ignore the March announcement and stick with the original $6,900 contribution for 2018.
Why the change of heart?
What the IRS didn’t realize was that a measly $50 reduction in family HSA contribution limits would create numerous administrative and financial burdens for all parties involved. For starters, people that maxed out their HSA at the start of 2018, prior to the March announcement, would need to remove their excess contribution or face a 6 percent excise tax. And, since HSA providers were caught off guard by the $50 change, they may not be prepared to handle the requests immediately. Plus, the costs of modifying various systems to reflect the reduced maximum and distributing excess contributions would far outweigh the tax benefit. In response to these concerns, the IRS decided that sticking with the initial $6,900 limit would be in everyone’s best interest.
Now what?
With all this back and forth, it’s tough to know what to do. Do you do nothing or are there steps you need to take in response to the latest IRS announcement? Depending on if you are an impacted taxpayer or employer, your action steps vary:
- Employee with HDHP who contributes to family HSA: If you contributed $6,900 and withdrew $50 (including earnings), you can either keep the money withdrawn or repay your HSA by April 15, 2019. However, keep in mind that the HSA provider is not required by law to let you repay the withdrawn amount. And, if you keep the withdrawn amount, you could be taxed on the $50 (including earnings).
- Employers that offer HSAs under HDHP: Communicate the changes to your employees, especially if you informed them about the initial reduction from $6,900 to $6,850. Also, if you or your payroll provider reprogrammed your payroll system to reflect the $6,850 contribution limit, switch the limit back to $6,900.
If you have questions about the 2018 HSA family limit changes and impacts, please contact your Payroll Data Client Service Representative or send us a note. We are here to help!