April 26, 2018

IRS Releases Guidance to Fix HSA Family Contribution Limit Issue for 2018

by Ben Lupin and Anu Gogna, Willis Towers Watson

Summary
The IRS released Revenue Procedure (Rev. Proc.) 2018-27 which announced relief for taxpayers with family coverage under a High Deductible Health Plan (HDHP) who contribute to a Health Savings Account (HSA). For 2018, taxpayers with family coverage under an HDHP may treat $6,900 as the maximum deductible HSA contribution.

A change in the inflation adjustment calculations for 2018 under the Tax Cuts and Jobs Act (due to the application of chained CPI), reduced the maximum HSA contribution for taxpayers with family coverage under an HDHP by $50, to $6,850 (the $6,900 limit was previously announced by the IRS in Rev. Proc. 2017-37). Revenue Procedure 2018-27 announces relief for affected taxpayers by allowing the $6,900 limitation to remain in effect for 2018. In addition, it provides clarifications on how taxpayers who already received a distribution from an HSA of an excess contribution based on the $6,850 deduction limit may treat the distribution as a mistake and repay the HSA without any tax or reporting consequences.

Key Action Items
1. Employers who had not yet made any changes (likely in anticipation of IRS guidance) do not have to take any action and can rely on the Rev. Proc. 2018-27 to effectively ignore the issue created by the reduction of the family contribution limit for 2018 (i.e., the family contribution remains at $6,900).

2. For employers that already changed the family contribution limit as a result of the previous IRS guidance, the employer may permit the individual HSA holder to repay the $50 (including earnings) to the HSA and the repayment will not be considered an excess contribution (subject to gross income and excise taxes). However, employers should be aware that a HSA trustee or custodian is not required to allow individuals to repay mistaken distributions. Furthermore, if the amount is not repaid by the HSA holder, then the IRS clarified that such distributions will not be includible in gross income nor subject to tax as an excess contribution.

Timing
Rev. Proc. 2018-27 is effective immediately and applies for the 2018 calendar year.