IRS gives taxpayers relief from erroneous HSA contributions

By Sally P. Schreiber, J.D.

The IRS announced on Thursday that it is modifying 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. Under Rev. Proc. 2018-27, taxpayers will be allowed to treat $6,900 as the annual limitation instead of the $6,850 limitation announced in Rev. Proc. 2018-18.

The IRS is making the change to allow taxpayers to use the limitation it originally announced in Rev. Proc. 2017-37, which was issued last May. The limitation was revised in Rev. Proc. 2018-18 after the passage of P.L. 115-97, known as the Tax Cut and Jobs Act, which mandated new calculations of various inflation-adjusted amounts, including HSA limitations.

After the IRS announced the new lower limit, 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 for qualified medical expenses.

Sally Schreiber (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

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