IRS Retroactively Reduces 2018 HSA Contribution Limit (from $6,900 to $6,850) for Participants with Family Coverage
The Tax Cuts and Jobs Act (the Tax Act) changed the inflation adjustment method applied to various limits under the federal tax Code, particularly the HSA contribution limit for those with high deductible coverage for spouses, children or families (family coverage). In October 2017, before the Tax Act was enacted, the IRS announced the annual HSA contribution limit for those with family coverage would be $6,900 for 2018. But on March 6, in Revenue Procedure 2018-18, the IRS changed numerous inflation-adjusted limits for 2018, including reduction of the previously-announced HSA contribution limit for those with family coverage from $6,900 to $6,850. Obviously, a mid-year decrease in this HSA contribution limit is problematic for employers and employees.
Most employers administer employee HSA contributions (and any employer contributions) through their cafeteria plan and this change in the annual contribution limit, by itself, is not a permissible change in status event for cafeteria plan participants. But remember, the HSA rules "override" the change in status rules, so employees contributing to their HSAs through a cafeteria plan may change their HSA contribution election any time during the year (on a prospective basis for future pay periods).
Based on this change, employees should be notified of the change to this HSA contribution limit for 2018. Employers should also inform those who previously elected $6,900 how their HSA election for the remainder of 2018 will be adjusted to comply with the new $6,850 maximum HSA contribution for anyone with spouse/family HSA plan coverage.
Employees who already contributed $6,900 based on the previous IRS guidance must contact their HSA custodian and instruct it to remove the $50 excess contribution (plus any earnings on the excess amount) from their HSA before the tax return filing deadline for 2018 (in April of 2019). Only the employee who is the HSA account holder can instruct the HSA provider to remove any excess contributions and those who fail to remove the excess amount are subject to a 6% tax penalty for each year the excess remains in their HSA.
For questions regarding an employee benefits matters, please contact a member of Barrett McNagny's Employee Benefits group.