Changes to cost of living adjustments for health savings accounts (“HSAs”) by the Tax Cuts & Jobs Act of 2017 (the “Act”) caused a $50 decrease in the contribution limit for family coverage to HSAs for 2018.  The limit was reduced from $6,900 to $6,850 (original limit here; revised limit here).

This affects only 2018 contributions for employees with family coverage who have exceeded or made elections that will exceed the original HSA contribution limit for 2018.

Next Steps for Employers:

First, reach out to your HSA custodian to make sure the custodian is aware of the change and discuss systems they could put in place to ensure that future contributions do not exceed the revised limit.  Identify employees who have already exceeded the revised limit or have elected to “max out” for the year.

Second, communicate with employees.  Plan sponsors may wish to wait before communicating with employees to see if the IRS issues transition guidance.  Members of Congress and industry groups are raising concerns about the revised limit.  Reps. Mike Kelly (R-PA) and Erik Paulsen (R-MN) urged Treasury and IRS to provide transition relief.

As long as employees withdraw the amount (and any attributable earnings) that exceeds the revised limit by the employee’s tax filing deadline for 2018 (with extensions), affected employees will avoid the 6% penalty that applies for excess contributions to HSAs.  While employees are responsible for managing their HSAs to ensure that contributions qualify for favorable tax treatment, you may want to communicate the revised contribution limit to your employees.  Consider the following:

  • Who will send the communication . . . you or the HSA custodian?
  • To whom will you send the communication . . . all employees, only employees who elected family coverage, only employees who have already exceeded or elected to “max out” under the original limit?

Third, revise materials.  You will want to update any materials that describe the HSA contribution limit for 2018, including your company’s intranet, enrollment materials for new hires, summary plan descriptions (“SPDs”), and call center FAQs.

Consequences for Employees (If No Transition Guidance):

  • Employees who have already exceeded the revised $6,850 limit will need to withdraw the excess (plus earnings) from their HSA to avoid a tax penalty before the last day (with extensions) for filing their federal income return for 2018, generally April 15, 2019, to avoid the 6% penalty. The withdrawal should be treated as a withdrawal of excess funds and not as a nonqualified distribution.
  • Employees who elected to fund their HSA up to the original $6,900 limit ratably through payroll deductions will need to make a new election prospectively to avoid exceeding the revised $6,850 limit and facing a tax penalty.