IRS Relief for Taxpayers Affected by Reduced HSA Limit

IRS Relief

 The Internal Revenue Service (IRS) is offering relief to individuals who contribute to a Health Saving Account (HSA) that have coverage under a family High Deductible Health Plan (HDHP). 

Background

As reported previously in the March Tax Alert, a change in the inflation adjustment calculations for 2018 under the Tax Cuts and Jobs Act (TCJA) had reduced the maximum deductible HSA contribution for individuals with family coverage under an HDHP by $50 to $6,850.  

On April 26, 2018, the IRS published Revenue Procedure 2018-27 that modifies the 2018 calendar year annual limitation on deductions for contributions to family HSAs. The Treasury Department and the IRS have determined that it is in the best interest of sound and efficient tax administration to allow taxpayers to treat the $6,900 annual limitation originally published in Revenue Procedure 2017-37 as the 2018 inflation adjusted limitation on HSA contributions for eligible individuals with family coverage under an HDHP.  

Revenue Procedure 2018-27 Guidance 

The new guidance provides clarification for taxpayers who may have already received distributions from an excess HSA contribution based on the $6,850 deductible limit. This guidance allows the taxpayer to treat the distribution as a “mistake of fact due to reasonable cause” under Q&A-37 in IRS Notice 2004-50 and allows the taxpayer to repay the HSA with no consequences. The amount of the distribution (including earnings) that taxpayer repays 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). 

Alternatively, a taxpayer who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit published in Rev. Proc. 2018-18 and does not repay the distribution to the HSA may treat the distribution in accordance with section 223(f)(3), which describes the treatment of excess contributions returned before the due date of return. The excess contribution generally would not be included in gross income under section 223(f)(2) or subject to the 20% additional tax under section 223(f)(4), provided the distribution is received on or before the last day prescribed by law (including extensions of time) for filing the individual’s 2018 tax return. 

Thank you for choosing Paylocity as your Payroll Tax partner. Should you have any questions please contact your Paylocity Account Manager.  

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.