On April 26, 2018 the IRS issued Revenue Procedure 2018-27 providing transition relief for the 2018 limit on Health Savings Account (“HSA”) contributions for family coverage. The guidance allows individuals to continue to treat the family coverage limit as $6,900 for 2018.
As previously explained in our One Minute Memo, in March 2018, the IRS retroactively reduced the amount of contributions permitted by account-holders with family coverage from $6,900 to $6,850. This $50 mid-year reduction caused both administrative burden for employers and possible negative tax ramifications for employees who relied on the earlier announced limit.
Under the guidance, if an individual receives a distribution from an HSA of an excess contribution (with earnings) based on the lower $6,850 limit announced in March, then the employee has the following options:
- Repay the distribution to the HSA by April 15, 2019; and
- Treat the distribution as a mistake under IRS Notice 2004-50, meaning the repayment is not included in the employee’s gross income and is not subject to additional taxes applicable to repayments.
If repaid, an employer does not need to report the distribution on Form 1099-SA or Form 8889.
- Not Repay
- Not repay the distribution to the HSA, but treat the distribution as an excess contribution which was returned before the due date of the individual’s tax return (provided the distribution is received on or before the due date); and
- The excess contribution will not be included in gross income or subject to the 20% excise tax.
However, if the distribution from the HSA was attributable to employer contributions (including employee contributions through a cafeteria plan), and the employer treats $6,900 as the limit for 2018, then the amount distributed as an excess contribution will be included in income and be subject to the 20% excise tax unless the amount distributed is used to pay qualified medical expenses.
Employers with high deductible health plans will want to inform their employees about the updated 2018 HSA family contribution limit. Employees who previously reduced their 2018 HSA family contribution limit may want to increase their election for the new $6,900 limit.