If you have a Health Savings Account (HSA) with family coverage, determining your 2018 contribution limit has been an adventure. This in one of the many unintended consequences of the Tax Cuts and Jobs Act (TCJA).
Many of the HSA limits are indexed annually for inflation. Back in May of 2017, the new numbers for 2018 were released. At that time, it was announced that the 2018 HSA contribution limit for those with family coverage would be $6,900 ($7,900 for HSA owners age 50 or over). It seemed like business as usual for HSA owners, but things were about to get a little more interesting with the arrival of tax reform.
The TCJA was signed into law very late in December of 2017. This massive piece of tax legislation includes a change to the way many limits in the tax code are indexed for inflation starting in 2018. Among the limits affected are the HSA contribution limits. This resulted in the IRS releasing a new lower contribution limit of $6,850 ($7,850 for those HSA owners age 50 or over) in March of 2018. Although the difference between the new limit and the old limit was only $50, the IRS received many complaints about this sudden change in the middle of the year. Many HSA owners and administrators were not happy.
The new limit caused a problem for some HSA owners. If they fully funded their HSA early in 2018 relying on the higher limit, they would be left with an excess contribution of $50 in their HSA. That excess would be subject to a 6% penalty if not timely corrected. The new limit also caused headaches for HSA administrators who were faced with making adjustments for the new lower limits with no warning or time to prepare. Industry leaders and members of Congress asked the IRS to issue some transitional relief.
In response, the IRS has now issued guidance that returns the 2018 HSA family contribution limit for those with family coverage back to $6,900 ($7,900 for HSA owners age 50 or older). In other words, meet the new HSA contribution limit: same as the old contribution limit! To help out those HSA owners who may have already taken a distribution of the $50, plus earnings attributable, from their HSAs to fix what they believed to be an excess contribution, there is also some relief. The IRS has said that those distributions may be repaid to the HSA as a return of a mistaken distribution.