On March 5, 2018, the Internal Revenue Service (IRS) released Rev. Proc. 2018-18, which changes the family limit on annual contributions to Health Savings Accounts (HSAs). The Revenue Procedure announced that the HSA limit for families is reduced by $50 to $6,850 for the 2018 calendar year. Last year the IRS set the 2018 HSA limit for families at $6,900, with the limit for individuals set at $3,450. The limit for individuals remains the same.
As discussed in an earlier Eversheds Sutherland legal alert, the tax bill signed into law last December changed the cost of living index for certain fringe and other benefits, including HSAs, from CPI-U to C-CPI-U. This change meant that the cost of living index rose a little more slowly than it would have under the CPI-U, requiring the IRS to adjust the family HSA contribution limit for 2018.
The new limit of $6,850 is retroactive back to January 1, 2018. This means that some families may have already contributed $6,900 to their HSAs for the year, exceeding the new limit by $50. It is possible that the IRS may announce a simplified method to fix this issue, but in the absence of any special methodology, it appears that the $50 should be treated as any other excess contribution to an HSA. In that case:
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Any excess contribution, plus allocable earnings, should be distributed to the employee by the employee’s tax filing due date for 2018, including extensions.
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The allocable earnings are taxable to the employee in the year withdrawn.
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If the excess is not distributed by the tax filing due date, including extensions, it will be subject to a 6% excise tax.
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Employees should be aware that HSA vendors may charge a processing fee for a distribution of excess contributions.
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Note that if the entire $6,900 has already been reimbursed from the HSA, the HSA holder may be required to report the excess $50 as income and may be subject to the excise tax described above.
While the IRS is thinking about HSA issues, numerous employee benefits practitioners are recommending that the IRS also consider mandating that word processing software stop auto-correcting HSA to HAS.
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