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IRS Again Modifies 2018 Annual Limits on HSA Contributions

Publications - Client Alert | April 30, 2018

On April 26, 2018, the Internal Revenue Service (the “IRS”) released Revenue Procedure 2018-27 (the “Revenue Procedure”), again modifying the 2018 annual limit for health savings account (“HSA”) contributions for individuals with family coverage in a high deductible health plan (“HDHP”). As we discussed in our previous Client Alert, in March the IRS reduced the 2018 annual limit for HSA contributions for individuals with family coverage in an HDHP to $6,850, a decrease from the originally announced $6,900.

The IRS, citing the administrative and financial burdens of this $50 reduction, announced in the Revenue Procedure that taxpayers may treat the original $6,900 as the 2018 annual limitation on HSA contributions for eligible individuals with family coverage under an HDHP. The Revenue Procedure did not affect any other cost-of-living adjustments.  An updated cost-of-living adjustment chart is attached below.

Compliance with Previous Limit

Many employers proactively responded to the previously announced reduction by distributing excess HSA contributions to the extent contributions made by individuals with family HDHP coverage exceeded the reduced annual limit. The Revenue Procedure provides that the individual tax treatment of these distributions will differ depending on whether:

  • The distribution is received before the deadline for filing the individual’s tax return
  • The individual recontributes the distribution to his or her HSA
  • The HSA is offered under a cafeteria plan
  • The funds distributed were attributable to employer contributions

Due to the Revenue Procedure, employers who had not yet taken steps to comply with the previously announced lower HSA limit will not be required to make changes to their 2018 HSA contribution limits for individuals with family coverage under an HDHP (which has now been revised back to $6,900).

Next Steps

Unfortunately, employers who proactively complied with the reduced contribution limit may have work to do.  Those employers should consider whether they will return to the $6,900 annual limitation for HSA contributions for individuals with family HDHP coverage.  In making this decision, employers should consider the effect on their payroll systems, the burden of collecting new salary reduction agreements, and the individual tax treatment for individuals who received a distribution due to the previously reduced limit.

Additional Information

If you have any questions regarding the revised cost-of-living adjustment or questions regarding the individual tax treatment of distributions made on account of the previously announced limit, please contact a member of our Employee Benefits Practice Group.