When Congress changed the method of computing most inflation adjustments by moving to the chained CPI calculation as part of the Tax Cuts and Jobs Act signed into law in December of 2017, virtually all of the inflation adjusted numbers for 2018 had already been published and some actions had been taken in reliance on those numbers. When those numbers changed, that put some taxpayers in a tough position.
Specifically, the IRS announced in Revenue Procedure 2018-18 that the maximum contribution to a health savings account for an individual with family coverage would be reduced by $50, to $6,850 rather than the $6,900 limit originally provided for in Revenue Procedure 2017-37 that was issued in May of 2017. In response to numerous complaints about this change announced after 2018 had already begun, the IRS in Revenue Procedure 2018-27 announced that the agency would continue to treat $6,900 as the maximum contribution for an individual with family coverage.
For taxpayers that had already withdrawn the $50 excess contribution from their HSA, the procedure provides two forms of relief.
If the taxpayer wishes to put the $50 back into the account, the IRS provides the following relief:
An individual who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit published in Rev. Proc. 2018-18 may repay the distribution to the HSA and treat the distribution as the result of a mistake of fact due to reasonable cause under Q&A-37 of Notice 2004-50, 2004-2 C.B. 196. Accordingly, the portion of a distribution (including earnings) that an individual repays to an HSA by April 15, 2019, is not included in the individual’s gross income under section 223(f)(2) or subject to the 20 percent additional tax under section 223(f)(4), and the repayment is not subject to the excise tax on excess contributions under section 4973(a)(5). Mistaken distributions that are repaid to an HSA are not required to be reported on Form 1099-SA or Form 8889 and are not required to be reported as additional HSA contributions. However, in accordance with Q&A-76 of Notice 2004-50, a trustee or custodian is not required to allow individuals to repay mistaken distributions.
Since the custodian does not have to allow for a repayment and some taxpayers may not wish to go through the hassle of repaying the $50 plus earnings, even if the custodian allows for repayment, the procedure provides other relief for those not placing the funds back in an HSA:
Alternatively, an individual who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit published in Rev. Proc. 2018-18 and does not repay the distribution to the HSA may treat the distribution in accordance with section 223(f)(3), which describes the treatment of excess contributions returned before the due date of return. Thus, the excess contribution generally would not be included in gross income under section 223(f)(2) or subject to the 20 percent additional tax under section 223(f)(4), provided the distribution is received on or before the last day prescribed by law (including extensions of time) for filing the individual’s 2018 tax return.
However, if the money is not put back into the account and it was excluded from an employee’s wages by the employer (an employer contribution), then the IRS notes the result is different:
The tax treatment described in the preceding paragraph does not apply to distributions from an HSA that are attributable to employer contributions (pursuant to a cafeteria plan election or otherwise) 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 limitation on deductions under section 223(b)(2)(B). In that case, unless the distribution from the HSA is used to pay qualified medical expenses, the distribution is includible in the employee’s gross income under section 223(f)(2) and subject to the 20 percent additional tax under section 223(f)(4).