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(Another) Change to the Annual HSA Limit

May 9, 2018Articles For Your Benefit

On April 26, 2018, the IRS released welcomed guidance in the form of Revenue Procedure 2018-27. Rev. Proc. 2018-27 reverses a recent change made to the annual limitation on health savings account (HSA) contributions for individuals electing family coverage under their high deductible health plan. This is much needed relief for individuals with such coverage, as well as many employers who were scrambling to accommodate a downward adjustment to the annual limitation based on retroactive IRS guidance issued earlier this year.

Specifically, the IRS had previously adjusted the annual limitations for individuals enrolled in family coverage from $6,900 per year to $6,850 per year; the inflation adjustment was made earlier in 2018, via Rev. Proc. 2018-18, and applied retroactively to all of 2018 without any transition relief. As a result, employers were left trying to reconcile this new, lesser maximum amount with elections already made by employees, such as annual salary reduction elections made through cafeteria plans. As one might imagine, the administrative issues and financial burdens created some unrest as to how to account for this $50 reduction without exposing employees to the penalties associated with excess contributions.

Fortunately, this new guidance allows those $6,900 contribution elections to remain in place without triggering excise taxes for excess contributions. Further, Rev. Proc. 2018-27 includes guidance for those who already received a $50 distribution based on the change. Those individuals may repay that distribution to their HSA and treat the distribution as the result of a mistake of fact due to reasonable cause, and it will not be included in that individual’s gross income. Alternatively, individuals can retain the $50 distribution and it will not be subject to the 20% additional tax or included in gross income so long as the distribution is received on or before the taxpayer’s 2018 tax return filing due date.