The Health Savings Account (HSA) annual limitations for 2018 have been modified once again. On May 4, 2017, the IRS issued Revenue Procedure 2017-37 which provided the 2018 inflation adjusted amounts for HSAs. That revenue procedure determined that the annual limitation on deductions for an individual with family coverage under a high deductible health plan (HDHP) was $6,900 ($7,900 age 55 and older).
Then on December 22, 2017, the Tax Cuts and Jobs Act modified the inflation adjustments for certain provisions of the Internal Revenue Code, including the inflation adjustments for HSAs. As a result of the new law, the IRS issued Revenue Procedure 2018-18 on March 2, 2018 which superseded Revenue Procedure 2017-37 to reflect the statutory amendments to the inflation adjustments. The new annual limitation on deductions for an individual with family coverage under an HDHP was $6,850 for 2018, which was a $50 reduction from the previous limitation announce in Revenue Procedure 2017-37. None of the other HSA inflation adjustments for 2018 were changed.
The IRS received a number of complaints stating that implementing the $50 reduction to the limitation would impose numerous unanticipated administrative and financial burdens. Some individuals with family coverage made the maximum HSA contribution for the 2018 calendar year prior to the issuance of Revenue Procedure 2018-18. Other individuals made annual salary reduction elections for HSA contributions through their employer’s cafeteria plans based upon the $6,900 limit. The costs of modifying the various systems to reflect the reduced maximum, as well as the costs associated with distributing a $50 excess contribution plus earnings would be significantly greater than any tax benefit associated with an unreduced HSA contribution. Some also pointed out that IRC section 223(g)(1) requires annual inflation adjustments for HSAs to be published by June 1 of the preceding calendar year.
In response to these concerns, the IRS has determined that it is in the best interest of sound and efficient tax administration to allow taxpayers to treat the $6,900 annual limitation originally published as the 2018 inflation adjusted limitation on HSA contributions. Any individual who has already received the $50 (plus earnings) distribution from an HSA of excess contributions based on the $6,850 limit may repay the distribution to the HSA and treat the distribution as the result of a mistake of fact due to reasonable cause. If the individual repays such distribution back into the HSA by April 15, 2019, it is not included in the taxpayer’s gross income or subject to the 20% penalty, nor is it subject to the excise tax on excess contributions.
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