$6,850 maximum HSA contribution for 2018? Never mind
On second thought, no. Ever since the IRS’ midyear reduction to the maximum health savings account contribution, to $6,850, from $6,900, employees, employers and HSA custodians have been clamoring for guidance on what to do with that extra $50, plus earnings.
The IRS now says forget it—the maximum HSA contribution for employees with family coverage under high deductible health plans remains $6,900 for 2018.
The IRS has also provided guidance to employers and employees who took the extra $50.
The IRS usually releases the HSA and high deductible amounts for the next year in the spring. This year, employees with family coverage under high deductible health plans were told they could contribute up to $6,900 into their HSAs.
Then the Tax Cuts and Jobs Act came along with a new way to measure inflationary changes. The IRS had to reduce the 2018 maximum to $6,850 as a result.
Hitch: Lots of employees had already maxed out on their contributions before the reduction or had set their pretax contributions to that amount. And once pretax contributions are set, they generally can’t be changed.
The IRS says that employees who took distributions of that extra $50, plus earnings, can put it back into their HSAs by April 15, 2019, because the distribution is attributable to a mistake of fact.
No income taxes will be due, the 20% additional tax that would apply when HSA distributions aren’t used for qualified medical expenses won’t apply and employees won’t be on the hook for the 6% excise tax that applies to excess contributions.
Snag: HSA custodians—usually banks—don’t have to accept employees’ repayments.
If HSA custodians don’t accept employees’ recontributions, or employees don’t want to go to the trouble of recontributing the money, they can keep it. The $50, plus earnings, isn’t included in their gross income and isn’t subject to the 20% additional tax. It is, however, subject to the 6% excise tax.
Employer HSA contributions are different
This no-tax rule, however, doesn’t apply to distributions from HSAs that are attributable to employer contributions under cafeteria plans or otherwise.
Reason: You’ve treated the $6,900 as the annual limitation on deductions. In these cases, employees’ distributions would remain tax-free only if they use them to pay for qualified medical expenses.
If they don’t use the money for qualified purposes, the $50, plus earnings, must be included in their gross income and will be subject to the 20% additional tax, but not the 6% excise tax.
You’re off the hook, mostly
You should let employees know about their options and the crucial tax difference if HSAs are provided through your cafeteria plan or you contribute or match employees’ contributions.
Qualified medical expenses don’t include monthly premium payments, but do include expenses not covered by insurance because, for example, employees haven’t satisfied their deductibles. So it might be time for employees to visit their optometrists or dentists.