Alert / Employee Benefits
IRS grants reprieve from $50 HSA contribution reduction

The IRS announced relief from the recent $50 reduction in maximum HSA contributions for 2018, for HSA-eligible individuals enrolled in other than self-only high deductible health plan (HDHP) coverage. The IRS said such individuals may contribute up to the original limit of $6,900.

In mid-2017 the IRS set the 2018 HSA contribution maximum at $6,900 for individuals enrolled in other than self-only coverage under an HDHP. But early this year, in response to the recent tax reform legislation, the IRS adjusted that limit to $6,850. After requests from many quarters to offer a reprieve from the change, the IRS issued that relief today. The IRS announcement is here.

The IRS announcement includes relief for individuals who made a $6,900 contribution early in the year, under the original maximum, then took a $50 “corrective distribution” (potentially with earnings) from their HSAs to comply with the adjusted $6,850 limit. The IRS says these individuals may treat their corrective distributions as distributions due to a mistake and may recontribute the $50 (and earnings, as applicable) without making any additional filings with the IRS.

Alternatively, if an individual took a $50 corrective distribution to comply with the $6,850 limit and chooses not to re-contribute the $50, the distribution isn’t treated as taxable income (and is not subject to the 20 percent penalty tax for premature distributions from HSAs) unless the $50 had been contributed by the employer, or pretax by the employee, and the employer does not include any portion of the contributions in the employee’s taxable wages. 

Lockton comment: Most people make contributions to their HSAs on a pretax basis through their employer’s cafeteria plan. If such an individual took a $50 cash corrective distribution, thinking his or her contribution maximum was $6,850 for the year, but the employer treats his or her tax-free contribution maximum as $6,900 for tax reporting purposes, the individual would have received $50 in cash, on which no tax would have been paid. He or she must pay tax on the distribution and the distribution is subject to the 20 percent penalty tax, unless the distribution reimbursed the individual for a medical expense.

Not Legal Advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton's Compliance Services group are not privileged under the attorney-client privilege.

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