IRS clarifies 2018 HSA family contribution limits

Tax Hot Topics newsletterThe IRS recently issued Rev. Proc. 2018-27 to provide relief from recent adjustments to the family coverage health savings account (HSA) contribution limits for 2018, modifying prior guidance issued in March.

On May 4, 2017, the IRS released Rev. Proc. 2017-37, which established the 2018 inflation-adjusted annual HSA contribution limit for family coverage under a high-deductible health plan (HDHP) at $6,900. Due to subsequent modifications of inflation adjustments, the IRS later issued Rev. Proc. 2018-18 on March 2, 2018, to adjust the 2018 annual family coverage contribution limit for an HSA down to $6,850.

In response, stakeholders informed the IRS that implementation of the $50 reduction to the 2018 HSA contribution limit would create undue administrative and financial burdens because a significant number of employees had already made 2018 contributions to their HSAs based on the $6,900 limit under Rev. Proc. 2017-37. The IRS responded by issuing Rev. Proc. 2018-27 to alleviate these concerns.

For calendar year 2018, Rev. Proc. 2018-27 allows taxpayers to treat $6,900 as the annual family coverage contribution limit for HSAs. Individuals who received a distribution from an HSA of an excess contribution (including earnings) because of the $6,850 contribution limit in Rev. Proc. 2018-18 may repay the distribution to the HSA and treat the distribution as a mistake of fact due to reasonable cause under Q&A 37 of Notice 2004-50. Mistaken distributions repaid to the HSA are not required to be reported on Forms 1099-SA or Form 8889 and are not required to be reported as additional HSA contributions. However, the HSA custodian or trustee is not required to allow individuals to repay mistaken distributions. Alternatively, taxpayers who do not immediately repay the distribution may treat the amount as an excess contribution returned to the HSA before the due date of the taxpayer’s return.

Under the two approaches listed above, distributions (including earnings) repaid to the HSA by April 15, 2019, will not be treated as includible in income or subject to the 20% additional tax on distributions not used for qualified medical expenses. Additionally, the repayment will not be subject to the excise tax on excess contributions to HSAs as imposed by Section 4973(a)(5).

Eddie Adkins
Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Washington National Tax Office
T +1 202 521 1526

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