The IRS announced a modification to the annual limitation on deductions for contributions to a health savings account (HSA) allowed for taxpayers with family coverage under a high-deductible health plan (HDHP) for calendar year 2018. It also released the 2019 inflation-adjusted contribution limits.
Under Sec. 223, individuals who participate in an HDHP are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. The contribution deduction limit is subject to an annual inflation adjustment. To be eligible to contribute to an HSA, an individual must participate in an HDHP, which is a health plan with an annual deductible that is not less than a certain limit each year and for which the annual out-of-pocket expenses, including deductibles, co-payments, and other amounts, but excluding premiums, do not exceed a certain limit each year (Sec. 223(c)).
2018 limits adjusted
Under Rev. Proc. 2018-27, released by the IRS in late April, taxpayers will be allowed to treat $6,900 as the annual contribution limitation for family coverage under an HDHP instead of the $6,850 limitation announced in Rev. Proc. 2018-18.
The IRS made the change to allow taxpayers to use the limitation it originally announced in Rev. Proc. 2017-37, which was issued in May 2017. The limitation was revised in Rev. Proc. 2018-18 after the passage of P.L. 115-97, known as the Tax Cuts and Jobs Act, which mandated new calculations of various inflation-adjusted amounts, including HSA limitations.
After the IRS announced the new lower limit in March, it heard complaints from individual taxpayers and other stakeholders, including employers and payroll administrators, that the change would be difficult and costly to implement. They also noted that some taxpayers with family coverage under an HDHP had made the maximum HSA contribution for 2018 before Rev. Proc. 2018-18 was issued and many others made annual salary reduction elections for HSA contributions based on the announced $6,900 limit.
To rectify this problem, the IRS is allowing taxpayers to treat $6,900 as the annual limitation on deductions for an individual with family coverage, and an individual who receives a distribution from an HSA in excess of the $6,850 limit published in Rev. Proc. 2018-18 may treat that distribution as the result of a "mistake of fact due to reasonable cause" under Q&A-37 of Notice 2004-50. The portion of a distribution (including earnings) that an individual repays to the HSA by April 15, 2019, will not be included in the individual's income under Sec. 223(f)(2) or be subject to the 20% additional tax under Sec. 223(f)(4). The repayment will not be subject to the excise tax on excess contributions under Sec. 4973(a)(5).
An individual who does not repay such a distribution will also not have to include it in gross income or pay the 20% additional tax, as long as the distribution is received on or before the individual's 2018 tax return filing due date (including extensions). However, this treatment does not apply to distributions from an HSA that are attributable to employer contributions if the employer does not include any portion of the contributions in the employee's wages because the employer treats $6,900 as the annual limitation on deductions under Sec. 223(b)(2)(B). In that case, the distribution is includible in the individual's income and subject to the 20% additional tax unless it was used to pay qualified medical expenses.
HSA contribution limits for 2019
Not long after adjusting the 2018 limits, the IRS issued the calendar year 2019 inflation-adjusted figures for the annual contribution limits for HSAs and the minimum deductible amounts and maximum out-of-pocket expense amounts for HDHPs (Rev. Proc. 2018-30).
For 2019, the annual limit on deductible contributions is $3,500 for individuals with self-only coverage under an HDHP (a $50 increase from 2018) and $7,000 for family coverage (a $100 increase from 2018).
The limits on annual deductibles are also subject to annual inflation adjustments. For 2019, the lower limit on the annual deductible for an HDHP is $1,350 for self-only coverage and $2,700 for family coverage, both unchanged from 2018. The upper limit for out-of-pocket expenses is $6,750 for self-only coverage and $13,500 for family coverage, both increased from 2018.