IRS Has Change of Heart, Offers Relief to Taxpayers with Family HSAs

The Internal Revenue Service has done a very good thing.  On April 26, 2018 it issued new guidance that will allow individuals with family coverage to contribute $6,900 to their HSAs for 2018 without penalty.  You may recall that the IRS created a bit of a firestorm on March 5, 2018 when it issued guidance (Rev. Proc. 2018-18) stating that the contribution limit would be lowered to $6,850 because of a change in the formula for calculating annual inflation adjustments resulting from the tax reform law enacted in December 2017.

 

In announcing the change, the IRS noted that implementing the $50 reduction to the family contribution limit would “impose numerous unanticipated administrative and financial burdens.”  As one might suspect, some individuals had already contributed $6,900 before the March 5 issuance of Rev. Proc. 2018-18 reducing the limit to $6,850.  Others had done so through payroll deduction under their employer’s cafeteria plan.  On the administrative side, there would have been significant costs to modify the various systems to reflect the reduced maximum, as well as the costs associated with distributing a $50 excess contribution (and earnings), all of which would have been significantly greater than any tax benefit associated with a $50 difference.

 

So in response to those concerns, the Treasury Department and the IRS have determined that “it is in the best interest of sound and efficient tax administration to allow taxpayers to treat the $6,900 annual limitation originally published in Rev. Proc. 2017-37 as the 2018 inflation adjusted limitation on HSA contributions for eligible individuals with family coverage under an HDHP.”  This is exactly what I had hoped they would say.

 

Additionally, for those that may have withdrawn $50 since the March 5 guidance was issued to bring their contributions down to $6,850, the IRS will allow those individuals to re-deposit the $50 without triggering any taxes or penalties.  However, they must do so by the income tax filing deadline for 2018 (i.e., April 15, 2019) without any extensions.

 

I applaud the IRS for this decision.  This is a great day for taxpayers that have HSAs.

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