IRS Restores $6, 900 HSA Contribution Limit (Family HDHP Coverage) for 2018

Practical Law Legal Update w-014-4809 (Approx. 5 pages)

IRS Restores $6,900 HSA Contribution Limit (Family HDHP Coverage) for 2018

by Practical Law Employee Benefits & Executive Compensation

Prior HSA Family Contribution Limits for 2018

In May 2017, the IRS issued the HSA and HDHP cost-of-living adjustments for 2018, under which the 2018 limit for individuals with family HDHP coverage was $6,900 (Rev. Proc. 2017-37). (Under this guidance, the annual HSA contribution limit for individuals with self-only HDHP coverage was $3,450.)

However, tax reform legislation enacted in December 2017 changed the inflation adjustments for HSAs under Section 223 of the Internal Revenue Code (Code), among other provisions (26 U.S.C. § 223). As a result, the IRS issued follow-on guidance in March 2018 that reduced the HSA contribution limit for individuals with family HDHP coverage from $6,900 to $6,850 (Rev. Proc. 2018-18; see Legal Update, Reflecting Tax Reform, IRS Changes Certain Benefit Limits for 2018). The limit for individuals with self-only HDHP coverage remained unchanged at $3,450.

Employer Response to the Reduced Limit

The $50 reduction in the limit for individuals with family HDHP coverage, announced after 2018 had already begun, was not popular with employers, plan administrators, and others. Commenters informed the IRS that the revised limit would impose numerous administrative and financial difficulties. For example, commenters indicated that:

Some individuals with family coverage, in reliance on the $6,900 contribution limit announced in May 2017, had already:
- made the maximum HSA contribution for 2018 before the IRS announced the revised limit in March 2018; and
- made annual salary reduction elections for HSA contributions through employer cafeteria plans based on the original limit (see Practice Note, Cafeteria Plans).
Modifying payroll and related administrative systems to reflect the reduced limit would be costly.
The costs to distribute the excess $50 (along with earnings) to individuals who had contributed $6,900 before the reduced limit was announced would exceed any tax benefit related to an unreduced HSA contribution.

Other commenters challenged the reduced limit by noting that the Code requires annual HSA inflation adjustments to be published by June 1 of the preceding calendar year (see 26 U.S.C. § 223(g)(1)).

Restored HSA Family Contribution Limit for 2018

In response to commenters' concerns, the IRS is allowing individuals to treat the original $6,900 annual limit (as published in May 2017 under Revenue Procedure 2017-37) as the 2018 HSA contribution limit for individuals with family coverage under an HDHP.

Individuals who receive a $50 distribution based on the reduced contribution limit announced in Revenue Procedure 2018-18 may repay the distribution and treat the distribution as the result of a mistake of fact due to reasonable cause (see IRS Notice 2004-50, Q&A 37). As a result, the portion of a distribution (with earnings) that the individual repays to an HSA by April 15, 2019 is not:

Included in the individual's gross income (26 U.S.C. § 223(f)(2)).
Subject to a 20% additional tax under the Code (26 U.S.C. § 223(f)(4); see Practice Note, Defined Contribution Health Plan: HSA Distributions).
Subject to the excise tax on excess contributions under Code Section 4973(a)(5) (26 U.S.C. § 4973(a)(5)).

The IRS indicated that mistaken distributions that are repaid to an HSA need not be reported:

On IRS Form 1099-SA or Form 8889.
As additional HSA contributions.

The IRS added, however, that HSA trustees and custodians are not required to permit individuals to repay mistaken distributions.

In some cases, an individual who received an HSA distribution (with earnings) based on the $6,850 limit might choose not to repay the distribution to the HSA. Under HSA rules governing the treatment of excess contributions that are timely returned, the excess contribution need not be included in gross income and would not be subject to the 20% additional tax. This assumes, however, that the distribution is received on or before a deadline that is generally keyed to when the individual's 2018 tax return must be filed.

Practical Impact

The IRS's guidance, which reverses the revised $6,850 limit announced in March 2018, will be welcome relief for employers, administrators, and others that had objected to the reduced limit and how to implement it. The restored limit should be communicated to employees. This latest guidance also includes a roadmap for dealing with distributions of excess contributions that were made in reliance on the reduced limit.

IRS Restores $6,900 HSA Contribution Limit (Family HDHP Coverage) for 2018 | Practical Law