On April 26, 2018, the Internal Revenue Service (IRS) released Revenue Procedure 2018-27 and restored the 2018 HSA contribution limit to $6,900 for an individual with family coverage under a higher deductible health plan (HDHP).
In March 2018, the Department of the Treasury (Treasury Department) and the IRS lowered the limit to $6,850 (originally set at $6,900 for 2018 on May 4, 2017) to reflect the statutory amendment to the inflation adjustments under the Tax Cuts and Jobs Act of 2017. As a result of the $50 reduction, stakeholders expressed concerns that the implementation would impose numerous unanticipated administrative and financial burdens, which would significantly outweigh any tax benefit associated with the original unreduced HSA contribution. In response to these concerns, the Treasury Department and the IRS decided to restore the original $6,900 HSA contribution limit for 2018.
If an individual has already received distribution of the excess contribution because of the previous midyear reduction in the limit, the IRS has provided the following relief:
The individual may repay the distribution to the HSA by April 15, 2019. The repayment is not included in the individual’s gross income, not subject to the 20 percent additional tax, and not subject to the excise tax on excess contributions. In addition, the repayment is not required to be reported on Form 1099-SA or Form 8889 and is not required to be reported as an additional HSA contribution.
If the individual does not repay the distribution to the HSA, he or she may treat the distribution as a returned excess contribution. Therefore, if the individual receives the distribution on or before the due date (including extensions) to file his or her 2018 tax return, the distribution generally would not be included in gross income or subject to the 20 percent additional tax.
However, when the distribution from the HSA is attributable to an employer contribution which is not included in the employee’s wages because the employer treats $6,900 as the 2018 limit, the distribution will be included in the employee’s gross income and subject to the 20 percent additional tax unless the distribution from the HSA is used to pay qualified medical expenses.
In summary, if actions have already been taken regarding the midyear reduction announcement, employers should consider the next steps, including reprogramming their payroll and administration systems, communicating the restoration of the higher limit and the relief to employees, and updating relevant materials and websites.
Han Liu authored this post.