IRS modifies 2018 HSA limits again

Posted May 1, 2018

In a recent guidance, the Internal Revenue Service (IRS), again modified the limits allowed for Health Savings Accounts (HSAs) for individuals with family coverage under a high deductible health plan (HDHP) for calendar year 2018. For 2018, taxpayers may treat $6,900 as the annual limitation on the deduction for an individual with family coverage under an HDHP.

The maximum for family coverage was originally issued as $6,900 on May 4, 2017. On March 2, 2018, however, the limit was reduced to $6,850 for taxpayers with family coverage under HDHPs due to the new tax law passed in December, which changed the calculation for 2018 and future years.

While $50 might not seem like much, excess contributions can impact excise tax. For those who already contributed the original maximum, the decrease in limit left taxpayers with a choice between leaving the extra $50 in their account and paying the extra tax, or trying to pull out the excess $50. To help, the latest guidance addresses a number of issues:

  • It allows taxpayers to continue to treat the 2018 limit as $6,900.
  • 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.
  • It clarifies how to treat a distribution of an excess contribution (and earnings) based on the $6,850 deduction limit.

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 or subject to the 20 percent additional tax, and the repayment is not subject to the excise tax on excess contributions.

Alternatively, an individual who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit and does not repay the distribution to the HSA, the excess contribution generally would not be included in gross income subject to the 20 percent additional tax, provided the distribution is received on or before the last day for filing the individual’s 2018 tax return.

This tax treatment 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. 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 and subject to the 20 percent additional tax.

This article was written by Darlene M. Clabault of J. J. Keller & Associates, Inc.


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