Taxpayers may treat the $6,900 original annual contribution limit for family coverage to health savings accounts (“HSAs”) as the limit for 2018, according to IRS guidance released on April 26, 2018 (press release; IRS Rev. Proc. 2018-27). Employers that took steps to comply with the reduced limit may need to take action.
As discussed in our earlier blog post, the contribution limit for family coverage to HSAs for 2018 was reduced by $50 from $6,900 to $6,850. Bowing to pressure from stakeholders who explained to the Treasury Department and IRS that implementing the reduction would impose administrative and financial burdens, the IRS announced that for 2018, taxpayers with family coverage under a high deductible health plan may treat $6,900 as the maximum deductible HSA contribution.
This is welcome relief for employers that had not yet taken steps to comply with the reduced limit. However, for employers that already informed participants of the change and took steps to modify salary reduction elections or return contributions in excess of the lower limit, this guidance likely triggers additional action.
Next Steps for Employers:
First, reach out to your HSA custodian to make sure the custodian is aware of the relief and discuss next steps. Second, communicate the impact to affected employees.
Impact If Distributed Contributions in Excess of Original Limit ($6,900)
The IRS guidance provides that employees who already received a distribution in excess of the $6,850 revised limit have two choices:
- Repay the distribution to the HSA and treat the distribution as if it was the result of a mistake of fact due to reasonable cause. The employee will not incur any tax penalties or additional reporting obligations if the distribution is repaid before the due date of the employee’s tax filing deadline for 2018, generally April 15, 2019, or an applicable later date with extensions.
As a general matter, HSA custodians are not required to allow repayment of mistaken distributions so will not be required to accept repayment of these amounts. Accordingly, employers will need to coordinate with their HSA vendors.
- Not repay the distribution to the HSA. Significantly, any distributions attributable to employer contributions (including contributions made pursuant to a salary reduction election under a cafeteria plan) and not included in wages by the employer (because the employer uses the $6,900 limit) must be used for qualified medical expenses or included in income and subject to the 20% additional tax.
Impact on Employees For Whom Employers Lowered Salary Reductions
IRS guidance is silent as to what steps employers should take if they prospectively lowered salary reductions to prevent employees from exceeding the revised limit of $6,850. Employers will want to notify affected employees of the new guidance and the opportunity to contribute up to $6,900. However, employers will need to consider whether, unless the employee takes other action, the lower elections will stay in place or elections will automatically increase consistent with their initial election.
The second option may be more in line with the original intent of employees and ensures employees will receive the greatest tax savings. Keep in mind that while, in general, cafeteria plan elections are irrevocable for an entire plan year, this general rule does not apply to HSA elections. Employees may prospectively stop, increase, or decrease their pre-tax salary reductions at any time during the plan year. Employers should discuss the appropriate steps to take with their benefits counsel.