IRS Announces Revised 2018 Cost of Living AdjustmentsPublications - Client Alert | March 8, 2018
On March 5, 2018 the Internal Revenue Service (the “IRS”) released Revenue Procedure 2018-18 (the “Revenue Procedure”), which includes revised cost of living adjustments for calendar year 2018. The Revenue Procedure replaces certain previously announced cost of living adjustments affecting employee benefit plans (an updated chart of these 2018 cost of living adjustments is attached below). The changes are due to a provision in the Tax Cuts and Jobs Act that requires the IRS to use the “Chained Consumer Price Index” to calculate cost of living adjustments under certain provisions of the Internal Revenue Code. Using the Chained Consumer Price Index generally means that going forward, the IRS will use a lower rate of inflation when calculating these cost of living adjustments.
Revisions Impacting Employee Benefits
Because the requirement to use Chained Consumer Price Index applies to calendar year 2018, the IRS retroactively revised certain cost of living adjustments affecting employee benefit plans. Specifically, the IRS announced the following for the 2018 calendar year.
- The annual health savings account (“HSA”) contribution limit for individuals with family coverage is now $6,850, a decrease from the previously announced $6,900.
- The amount that may be excluded from an employee’s gross income under an employer sponsored adoption assistance program in connection with the adoption of a child with special needs is $13,810, which is a decrease from $13,840. The adoption assistance program exclusion now begins to phase out for taxpayers with modified adjusted gross income in excess of $207,140 and is not completely phased out for taxpayers with modified adjusted gross income of $247,140 or more.
- For purposes of a high deductible health plan offered in conjunction with an Archer medical savings account (“MSA”), the maximum out of pocket for individuals with self-only coverage is now $4,550, a decrease from $4,600.
The new HSA contribution limit requires immediate action by employers to ensure their payroll systems do not allow 2018 HSA contributions to exceed $6,850. Employers should notify their employees of the new contribution limits and employees should correct any excess HSA contributions if their 2018 contributions exceed the $6,850 limit. New salary reduction forms may be needed to implement the lower HSA contribution limit. Employers should also determine whether the new adjustments to the adoption assistance program exclusion will affect payroll practices and benefit administration. Employers offering an Archer MSA should consider how the lower maximum out of pocket limits will affect their health plans offered in 2018. Employee communications and new hire enrollment materials may also need to be updated to account for the changes made by the Revenue Procedure.
If you have any questions regarding the revised cost of living adjustments or correcting excess HSA contributions, or if you would like assistance working with service providers to comply with the Revenue Procedure, please contact a member of our Employee Benefits Practice Group.