On March 5, 2018, the IRS released Revenue Procedure 2018-18, which, among other things, adjusts downward the 2018 total contribution limit to health savings accounts (HSAs) for individuals enrolled in family coverage. In late 2017, the IRS announced that the 2018 HSA limit for individuals enrolled in family coverage would be $6,900. The recently enacted tax reform legislation, however, required application of a new method of calculating inflation adjustments (i.e., Chained Consumer Price Index for All Urban Consumers, or C-CPI-U) beginning in 2018. Using the C-CPI-U method, the IRS adjusted the HSA limit for individuals enrolled in family coverage downward to $6,850. The HSA limit for individuals enrolled in self-only coverage, and the deductible parameters for high deductible health plans did not change.
The downward adjustment of the HSA limit for individuals enrolled in family coverage presents administrative issues for employers and HSA administrators as many HSA enrollees may have already maxed out their family contributions. This is particularly challenging if an individual had contributed the IRS-approved $6,900 maximum amount and used all of the funds for permitted medical expenses only to find out, after the start of 2018, that the limit was lowered.
In the absence of transition relief (Rev. Proc. 2018-18 did not include any relief), it would seem that any contribution above the $6,850 limit would be treated as an “excess” contribution, even if the contribution is only equal to the $50 previously permitted by the IRS. Under current IRS guidance, taxpayers would have until the filing deadline for individual income tax returns (here, in most cases, April 15, 2019) to remove any excess contributions (and any earnings attributable to them). If the excess contribution (and earnings) is not timely distributed, it would be subject to a 6% excise tax (which would be triggered each year until removed from the HSA).
Although this downward adjustment of the 2018 HSA limit after the beginning of 2018 may be unwelcome news for individuals, employers, and HSA administrators, there is still time to take corrective action if necessary. It is possible that the IRS might re-consider the application of this lower limit to individuals who otherwise contributed in excess of the $6,850 limit (in reliance on earlier IRS guidance). Therefore, one approach might be to wait for a while and see if the IRS issues some form of transition relief. If not, taxpayers who contributed in excess of the $6,850 limit for family coverage should consider their options for correction.