April 30, 2018
A little more than a month after announcing a $50 cut in the family health savings account (“HSA") contribution limit, the IRS has reversed course. Citing “numerous unanticipated administrative and financial burdens” in response to the $50 reduction, the IRS has said that taxpayers can treat the limit as $6,900 for 2018, restoring the status quo before the tax reform law. The individual and catch-up limits remain unchanged.
The good news is that if you did nothing in reaction to the previously announced limit cut, then you have nothing to do now (and you can stop reading).
But what if you (or your employees) took action in response to the prior announcement? There are some steps you can take now.
- Re-reprogram. If you (or your payroll vendor) reprogrammed your payroll systems to reflect the $50 limit cut, you can now undo that and go back to $6,900. Before automatically adjusting employee elections, you should make sure that employees have not made other changes to their elections. Some of them may have reduced their family HSA contribution well below $6,850 for personal financial reasons and may not want their prior election restored. Employers should also consider consulting with a wage and hour lawyer before automatically increasing employee elections.
- Re-communicate. If you communicated the $50 limit cut to your employees, you probably want to communicate this increase as well. This is especially true if you decide to automatically adjust employee elections back to the original $6,900 annual election so that employees have a chance to object or make other adjustments.
- Re-contribute (or not). If an employee had already hit the $6,900 limit before it was cut, he or she may have taken a withdrawal from their family HSA to avoid an excess contribution. The IRS guidance gives them two basic options:
- Recontribute the funds to the family HSA. This will not be considered an excess contribution subject to the 6% excise tax on excess contributions.
- Keep the money. If it was contributed through a cafeteria plan, then it will need to be included in income. If it was contributed directly by the employee, it will not. Either way, it will not be subject to the 20% penalty for distributions that are not used to reimburse for health expenses.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.