May 01, 2018
Inflation-adjusted limits for deductible contributions to health savings accounts (HSAs) for 2018 were recently announced. This was a result of the mandated new calculations of various inflation-adjusted amounts in the Tax Cut and Jobs Act. For family coverage, the contribution limit will be $6,850. For individual coverage, the limit is $3,450. If you are 55 or older, you can contribute an additional $1,000, as in prior years. When you combine an HSA with a high-deductible health insurance plan, you can set aside pretax contributions that can be later withdrawn tax-free to pay unreimbursed medical expenses.
After the IRS announced the new lower limit (the family contribution limit is $50 lower than the IRS had previously announced for 2018), it heard complaints from individual taxpayers and other stakeholders, including employers and payroll administrators, that the change would be difficult and costly to implement. In fact, some taxpayers with family coverage under an HDHP had made the maximum HSA contribution for 2018 before Rev. Proc. 2018-18 was issued and many others made annual salary reduction elections for HSA contributions based on the announced $6,900 limit.
To rectify this problem, the IRS is allowing taxpayers to treat $6,900 as the annual limitation on deductions for an individual with family coverage, and an individual who receives a distribution from an HSA more than the $6,850 limit published in Rev. Proc. 2018-18 may treat that distribution as the result of a “mistake of fact due to reasonable cause” under Q&A-37 of Notice 2004-50. The portion of a distribution (including earnings) that an individual repays to the HSA by April 15, 2019, will not be included in the individual’s income under Sec. 223(f)(2) or be subject to the 20% additional tax under Sec. 223(f)(4). The repayment will not be subject to the excise tax on excess contributions under Sec. 4973(a)(5).
An individual who does not repay such a distribution will also not have to include it in gross income or pay the 20% additional tax, if the distribution is received on or before the individual’s 2018 tax return filing due date (including extensions). However, this treatment does not apply to distributions from an HSA that are attributable to employer contributions 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 Sec. 223(b)(2)(B). In that case, the distribution is includible in the individual’s income and subject to the 20% additional tax unless it was used to pay for qualified medical expenses.
Please feel free to reach out to any of the accountants at Terry Lockridge & Dunn to discuss your situation if this pertains to you. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.