Alert / Employee Benefits
IRS lowers 2018 HSA contribution maximum, restores HSA possibilities

Yesterday the IRS threw a curveball to high deductible health plan (HDHP) enrollees everywhere by lowering the maximum contribution they can make to their health savings accounts (HSAs) for 2018 by $50, if enrolled in other than self-only coverage. The change, and other retroactive adjustments to certain fringe benefit limits and IRS penalties for 2018, are the result of the recent changes in federal tax law.

In other HSA news, Maryland recently mandated coverage of male sterilization, which rendered certain health insurance plans regulated by the state incompatible with HSAs. In response, the IRS has temporarily restored eligibility to make HSA contributions for persons enrolled in plans with state-mandated benefits for male sterilization or contraceptives. The IRS said it won’t consider these types of mandates as disqualifying the plans as HDHPs until 2020.

Tax reform and new 2018 benefit limits and penalties

Fringe benefit limits (like HSA contribution limits) and IRS-imposed penalties for things like late or incorrect filing of returns are adjusted annually based on changes in certain inflation indices. The recent federal tax reform law changed the index used for calculations to determine certain limits and penalty amounts for 2018, forcing the IRS to adjust several such limits and amounts even though the 2018 calendar year has already begun.

Adjusted limits and penalty amounts include:

  • HSA contributions: The maximum HSA contribution for 2018, for an individual enrolled under family HDHP coverage, is $6,850, down from $6,900. There is no change to the $3,450 maximum annual HSA contribution for individuals enrolled in self-only HDHP coverage, nor is there a change to the 2018 HDHP minimum deductibles or maximum out-of-pocket expense amounts.

Lockton comment: For employees who elected to make $6,900 in HSA contributions ratably for 2018 through the employer’s payroll system, we suspect those systems could be configured to ensure no more than $6,850 is contributed by year end. But for employees who have already made $6,900 in contributions for 2018, anticipating their continued eligibility to make such contributions for the entire year, the IRS’s announcement means the employees have already overcontributed to their HSAs to the tune of at least $50.

These individuals could ask their HSA trustee to distribute the extra $50 as taxable income, and that is likely the most straightforward way to deal with the excess. There are other, more complicated options, and we discuss those in our Benefits Insight & Guidance publication, So You Overcontributed to a Health Savings Account – Now What? The publication is available from your Lockton account service team.

  • Adoption assistance. The maximum amount of adoption assistance benefits an employee may receive tax-free in 2018 under an adoption assistance program is $13,810, down from $13,840. The phaseout of that benefit begins at modified adjusted gross income of $207,140 (down from $207,580) and is eliminated at modified adjusted gross income of $247,140 (down from $247,580).
  • Penalties for failure to file (or furnish a copy of) payee statements (e.g., W-2s, 1095-Cs, etc.). The penalty for failure to file (or furnish to an employee or other taxpayer) a correct payee statement is increased from $260 per statement to $270, with a slightly larger overall maximum penalty. The penalty for intentionally disregarding the obligation is $540 per statement, with no maximum.

Health savings accounts and state law disconnects

Before an individual is permitted to make contributions to an HSA, he or she must be enrolled in an HDHP and not enrolled in non-HDHP healthcare coverage, with limited exceptions for dental, vision and preventive care coverage, as well as certain wellness programs. Of course, the HDHP is not permitted to pay benefits below its high deductible, except for dental, vision and preventive care.

State insurance laws sometimes impose preventive care coverage mandates on insurance policies issued in or delivered to the state. For example, a Maryland law recently took effect for 2018, requiring first-dollar coverage for, among other things, male sterilization. The problem is that while Maryland views male sterilization as preventive care, the IRS – for HDHP purposes – does not.

Lockton comment: Nor does the IRS consider male contraceptives “preventive care,” for HDHP purposes. For more information on the Maryland law see our Benefits Insight & Guidance publication, Are Health Savings Accounts Dead in Maryland? The publication is available from your Lockton account service team.

The IRS took notice of state laws like Maryland’s, and generally assumes the state legislature wasn’t entirely aware of the effect its insurance mandate would have on employees’ HSA eligibility.

The IRS announced welcome transition relief in recognition of the possibility that state legislatures might want to eliminate or amend such a mandate, but that state legislatures typically are in session for only a part of the year and some only every other year.

The relief applies to individuals who are, have been or become covered by a health insurance policy that provides benefits for male sterilization or male contraceptives without a deductible or below the minimum deductible for an HDHP. Until 2020, such an individual will not be treated as failing to qualify as eligible to make HSA contributions merely because the individual is covered under a policy that includes such a mandate.

Edward Fensholt, J.D.  and Scott Behrens, J.D.
Compliance Services

View this alert
< Back to Insights & Publications
Discover more Insights & Publications  |  Read more in the Lockton Newsroom  |  See our Client Stories
Read more in the Lockton Newsroom
See our Client Stories