Volume 41 | Issue 19
The IRS has released guidance that immediately reduces the 2018 HSA maximum contribution limit for family coverage from $6,900 to $6,850. To avoid excise taxes employees will need to limit their 2018 contributions to the new maximum. The guidance also reduces the employer-provided adoption assistance exclusion from $13,840 to $13,810.
Early in 2017, the IRS issued the calendar year 2018 inflation-adjusted contribution limits for health savings accounts (HSAs) along with minimum deductible and maximum out-of-pocket (OOP) limits for high-deductible health plans (HDHPs). The limits are determined under Code section 223’s cost-of-living adjustment and rounding rules. (See our May 9, 2017 For Your Information.) In late 2017, the IRS released the exclusion limits for employer-provided adoption assistance programs. (See our October 20, 2017 For Your Information.)
Reduction in HSA Family Contribution Maximum
On March 5, the IRS released Internal Revenue Bulletin (IRB): 2018-10 that included a reduction in the HSA maximum annual contribution for family coverage by $50: from $6,900 to $6,850. No other changes were made to other HSA limits. The self-only maximum annual contribution remains at $3,450.
The reduction in the family contribution maximum is the result of a provision in the new tax reform law (Tax Cuts and Jobs Act) that changes the method for determining cost-of-living adjustments (indexing) for various purposes under federal law, including HSA contribution limits. (See our December 20, 2017 Legislate.) The change is effective immediately. The following table sets out the revised contribution limits for 2018. (The 2018 HDHP minimum deductible and maximum out-of-pocket amounts remain unchanged.)
|New 2018 Limits||Old 2018 Limits||Changes|
|HSA Statutory Contribution Amount|
|Self-only||$ 3,450||$ 3,450||No change|
|Catch-up Contribution (age 55 or older)||$ 1,000||$ 1,000||No change|
What Actions Should Be Taken?
Excess contributions to an HSA are included in gross income as well as subject to a 6% excise tax. To avoid the excise tax, salary reduction contributions (or employer contributions) for 2018 should not exceed the maximum contribution of $6,850 ($7,850 for employees eligible for the catch-up contribution). To that end, election and/or contribution amounts may need to be reduced to comply with this new limit.
To ensure that employees contributing to an HSA don’t exceed the 2018 maximum permitted contribution for family coverage, employers should consider the following:
Employees who have already contributed $6,900 must withdraw the excess amount, plus earnings, prior to filing their federal income tax return, including any extensions. For 2018, the excess contributions and earnings would typically need to be withdrawn by April 15, 2019. The employee can’t just withdraw the excess contribution themselves from the HSA. Instead, the employee must notify the HSA administrator of the correction and request a distribution for the excess contribution. HSA administrators often have a fee to process this special withdrawal.
How many employees are affected by this reduction in the limit?
Statistics from BenefitWallet®, an HSA solution offered by Conduent Human Resource Services, show that approximately 5% of employees make the maximum family contribution to an HSA.
What Happens if the Employee Takes No Action?
This change in the maximum contribution amount will likely be confusing to some employees who may take no action as result, or be unaware of any needed action. Depending on the circumstances, the excess contribution of $50, plus earnings, could be subject to taxation as well as a 6% excise tax. That said, the excise tax is likely to be minimal — $3 (6% of $50, ignoring the earnings). And in this instance, the employee could leave the $50 in the HSA and have it counted towards the 2019 contribution limit to avoid future excise taxes.
Adoption Assistance Programs
The IRS guidance also revised the 2018 amounts for adoption assistance programs. The 2018 maximum excludible amount was reduced by $30. The excludible amount phases out at higher incomes. The following table sets out the revised amounts for 2018.
|New 2018 Amounts||Old 2018 Amounts||Changes|
|Excludible amount||$ 13,810||$ 13,840||$30 reduction|
|Phase-out income thresholds|
|Phase-out begins||$ 207,140||$ 207,580||$440 reduction|
|Phase-out complete||$ 247,140||$ 247,580||$440 reduction|
Employers should quickly assess their HSA arrangement, contemplating the number of employees who elected the maximum contribution for family coverage. Working with attorneys, tax and other trusted advisors, employers should prepare and execute a strategy for the remainder of 2018 to address this issue. That strategy will include employee communications, election changes and/or automatic contribution reductions.