Just when you thought you had your Health Savings Account (HSA) all figured out and under control—boom—the IRS has switched it up again.
Less than two months ago, the IRS announced a reduction to the 2018 maximum allowable HSA payroll deduction, from $6,900 to $6,850. Feedback from employers, major stakeholders, and even individual taxpayers reflected dissatisfaction. And lots of it. Many of these vocal critics had already made their maximum contribution prior to the lowered deduction limitation or had submitted their annual salary reduction elections for HSA contributions through their employer’s cafeteria plans based on the $6,900 limit. Employers were looking at increased costs to modify their existing systems to accommodate the new limits.
Subsequently, the IRS determined it is in the best interest of a “sound and efficient” tax administration to go back to the $6,900 limit for family coverage under a high deductible health plan (HDHP) for the 2018 calendar year. No impact on other contribution amounts.
What if I already received an HSA distribution?
Rev. Proc. 2018-27 provides information to taxpayers who already took a distribution in 2018 from their HSA based on the reduced maximum limit of $6,850. Employees who receive a distribution from an HSA in excess of the $6,850 limit, may treat that distribution as the result of a “mistake of fact due to reasonable cause.” The portion of a distribution (including earnings) that an individual repays to the HSA by April 15, 2019, will not be included in the individual’s gross income.
With this in mind, it is not subject to the 20% additional tax for non-medical distributions either. The repayment will not be subject to the 6% excise tax on excess contributions either. Mistaken distributions repaid to an HSA do not require reporting on Form 1099-SA or Form 8889. They do not require reporting as additional HSA contributions either.
If you do not repay an HSA distribution
However, if an individual decides not to repay such a distribution, it is not included in their gross income. Additionally, if they receive the distribution by the individual’s 2018 tax return filing due date, it is not subject to the additional 20% tax. This does not apply to contributions from an HSA that are attributable to employer contributions – if the employer does not include any portion of the contributions in the employee’s wages because the employer treats $6,900 as the annual contribution limit. In those situations, the distribution would be included in the individual’s gross income and subject to the 20% additional tax, unless it paid for qualifying medical expenses.
To put it simply, if the employee withdraws the $50 and does not return it to the HSA, it’s not includible in income or subject to the 20% additional tax unless the $50 is reported as an employer contribution on the employee’s W-2 (in box 12, code W). In which case, it would be includible in their gross income and subject to the 20% additional tax.
If you, as an employer, informed your employees of the previously adjusted amount, you need to do that again. And if you adjusted withholding amounts, you need to do that again as well.