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April 30, 2018

CWF's IRA/HSA Guidance - IRS Grants Relief On HSA Reduction to $6850 From $6900

The IRS Issued guidance late Thursday that the $6900 HSA contribution limit may be used for 2018 in most situations. This changes their guidance of March 2, 2018. The IRS issued Rev. Proc. 2018-18 to reflect the statutory amendments made to the inflation adjustment calculations by the Reconciliation Budget Act. The reduction in the HSA contribution limit for a person with Family HDHP coverage from $6900 to $6850 was discussed in CWF's email as furnished on March 9, 2018.

We at CWF apologize, but we did not think the IRS would change its position on the Family HSA contribution limit being reduced to $6850 from $6900 and so we thought it best that the HSA owners withdraw their $50 excess contributions.

There was substantial public comment to the IRS and to the U.S. Treasury Department of the hardships that would be incurred to implement this relatively small change of $50. Commentators rightfully informed the IRS that the costs associated with modifying software, revising forms and having everyone who had already contributed $6900 withdraw the $50 as an excess contribution greatly exceeded the benefit arising from the increased tax revenues to be realized from reducing the amount eligible to be deducted or excluded from income by $50.

The IRS somewhat begrudgingly acknowledged that Code section 223(g)(1) does require the IRS to publish by June 1 of the preceding year (2017) the HSA contribution limits for the upcoming year (2018). It appears the IRS either forgot this statutory requirement or concluded without explaining why that this statutory law was overridden by the new Budget Act.

Last Thursday (April 26, 2018), the IRS issued in Rev. Proc. 2018-27 the following guidance and relief because it is the best interest of sound and efficient tax administration.

  1. For 2018, taxpayers are permitted to use $6900 as the maximum contribution for a person who has Family HDHP coverage.
  2. A taxpayer who has already withdrawn $50 plus earnings as an excess contribution is authorized to repay by April 15, 2019, into their HSA the $50 plus earnings. The person may treat this distribution as a mistaken distribution pursuant to Q & A -37 of Notice 2004-50. The distribution is not included in the individual's gross income, is not subject to the 20% tax and the repayment is not counted as a contribution towards the annual limit.

    Such transactions are not to be reported by the HSA custodian on Form 1099-SA and Form 5498-SA and are not reported by the individual on Form 8889.

    An HSA custodian may accept such repayments, but it is not required to do so.

   3. A taxpayer who has already withdrawn $50 plus earnings as an excess contribution is not required to repay the $50 plus earnings.        The individual  is authorized to continue to treat such withdrawal as the withdrawal of an excess HSA contribution.

   4. The tax treatment discussed under paragraph 2 does not apply if it was the employer who contributed the excess $50 and the         employer excludes  from the employee's wages the $6900. Such employer contributions could be a direct employer contribution or         it could be made pursuant to a cafeteria plan election. In this situation, the withdrawal of the $50, unless used to pay a qualified         medical expense, would need to be included in  the person's income and would be subject to the 20% tax, if applicable.

In summary, the IRS certainly complicated HSA administration by retroactively applying the cost of living adjustment to those HSA owners who had Family HDHP coverage for 2018. The public expressed their concerns and unhappiness and so the IRS decided to change their position and granted relief. . By doing so, the IRS is being reasonable and pragmatic. The IRS appears to want to make the public happier. The IRS many times does not have this attitude. The IRS most of the time wants to maximize the collection of tax revenues.


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