IRS Adjusts 2018 HSA Annual Limitation on Deductions

(Parker Tax Publishing May 2018)

The IRS modified the 2018 annual limitation on deductions for contributions to health savings accounts for individuals with family coverage under a high deductible health plan (HDHP) to bring it back to the limitation amount in effect prior to the change in the limitation announced in Rev. Proc. 2018-18. The modification was the result of complaints from stakeholders that implementing the $50 reduction to the limitation on deductions for individuals with family coverage would impose numerous unanticipated administrative and financial burdens. Rev. Proc. 2018-27.

Background

On May 4, 2017, the IRS issued Rev. Proc. 2017-37, which provided the 2018 inflation adjusted amounts for health savings accounts (HSAs) as determined under Code Sec. 223. Under Rev. Proc. 2017-37, the annual limitation on deductions under Code Sec. 223(b)(2)(B) for an individual with family coverage under a high deductible health plan (HDHP) was $6,900.

Subsequently, the Tax Cuts and Jobs Act of 2017 (TCJA) modified the inflation adjustments for certain provisions of the Code, including the inflation adjustments under Code Sec. 223. On March 2, 2018, the IRS released Rev. Proc. 2018-18, which superseded Rev. Proc. 2017-37, to reflect the statutory changes to the inflation adjustments under TCJA. Under Section 4 of Rev. Proc. 2018-18, the annual limitation on deductions under Code Sec. 223(b)(2)(B) for an individual with family coverage under an HDHP was $6,850 for 2018 a $50 reduction from the limitation announced in Rev. Proc. 2017-37. Rev. Proc. 2018-18 did not change any other annual limitation or any other requirement under Code Sec. 223 for calendar year 2018.

In response to Rev. Proc. 2018-18, stakeholders complained that implementing the $50 reduction to the limitation on deductions for individuals with family coverage would impose numerous 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 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 Code Sec. 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.

IRS Modifies Guidance

In response to these concerns, the IRS determined that it was in the best interest of sound and efficient tax administration to allow taxpayers to treat the $6,900 annual limitation originally published in Rev. Proc. 2017-37 as the 2018 inflation adjusted limitation on HSA contributions for eligible individuals with family coverage under an HDHP.

Rev. Proc. 2018-27 provides 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 under Q&A-37 of Notice 2004-50. Accordingly, the portion of a distribution (including earnings) that an individual repays to an HSA by April 15, 2019, is not included in the individual's gross income under Code Sec. 223(f)(2) or subject to the 20 percent additional tax under Code Sec. 223(f)(4), and the repayment is not subject to the excise tax on excess contributions under Code Sec. 4973(a)(5). Mistaken distributions that are repaid to an HSA 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, in accordance with Q&A-76 of Notice 2004-50, a trustee or custodian is not required to allow individuals to repay mistaken distributions.

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 in accordance with Code Sec. 223(f)(3), which describes the treatment of excess contributions returned before the due date of return. Thus, the excess contribution generally would not be included in gross income under Code Sec. 223(f)(2) or subject to the 20 percent additional tax under Code Sec. 223(f)(4), provided the distribution is received on or before the last day prescribed by law (including extensions of time) for filing the individual's 2018 tax return.

The tax treatment described above does not apply to distributions from an HSA that are attributable to employer contributions (pursuant to a cafeteria plan election or otherwise) if the employer does not include any portion of the contributions in the employee's wages because the employer treats $6,900 as the annual limitation on deductions under Code Sec. 223(b)(2)(B). In that case, unless the distribution from the HSA is used to pay qualified medical expenses, the distribution is includible in the employee's gross income under Code Sec. 223(f)(2) and subject to the 20 percent additional tax under Code Sec. 223(f)(4).

For a discussion of the limitation on deductions to HSAs, see Parker Tax ¶81,115

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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