IRS Reduces Health Savings Account Family Contribution Limit for 2018 IRS Reduces Health Savings Account Family Contribution Limit for 2018

IRS Reduces Health Savings Account Family Contribution Limit for 2018

In an unexpected move, the Internal Revenue Service ("IRS") has reduced the annual contribution limit to health savings accounts ("HSAs") for individuals with family coverage under a high deductible health plan ("HDHP"). The annual contribution limit for family coverage under an HSA for 2018 is now $6,850 (down from the previously announced $6,900). This change is effective immediately and may require some individuals to take distributions from their HSAs to avoid penalties. In addition, the IRS recently issued guidance clarifying that health plans that treat male contraception or male sterilization as preventive services will not qualify as HDHPs. However, the IRS granted transition relief so individuals covered under such plans will still be eligible to make HSA contributions through the end of 2019. 

HSA Family Contribution Limit Reduced for 2018

Typically in the spring of each year, the IRS announces the maximum annual contribution limits to HSAs for the following year. In Revenue Procedure 2017-37, the IRS announced the maximum contribution to an HSA for individuals with family coverage under an HDHP would be $6,900 for 2018. As a result of a change in the method for determining inflation-related increases included in the Tax Cuts and Jobs Act of 2017, however, the IRS recalculated the maximum family contribution to an HSA for 2018 and reduced it to $6,850. The IRS published the revised limit in Revenue Procedure 2018-18. The adjustment is effective immediately. The HSA contribution limit for individuals enrolled in single HDHP coverage remains unchanged at $3,450 for 2018.

Individuals who intended to make the maximum family contribution to HSAs in 2018 will need to adjust their contribution strategies so they do not exceed the newly announced maximum contribution of $6,850. Individuals who contribute to their HSAs through pre-tax payroll deduction may need to change their elections so the new limit is not exceeded by the end of the year. Employers that sponsor HDHPs should consider an employee communication informing their employees of this development. Individuals who have already made the $6,900 contribution will need to contact their HSA custodians and withdraw $50 prior to the deadline for filing their 2018 tax returns (generally, April 15, 2019). Failure to withdraw an excess contribution from an HSA can result in a penalty tax of 6% for each year the excess contribution remains in the HSA.

Male Contraception and Sterilization Not HDHP Preventive Benefits 

In related HSA news, the IRS issued Notice 2018-12, in which it clarified that male contraception and male sterilization are not preventive services for purposes of a health plan qualifying as an HDHP. Section 223 of the Internal Revenue Code permits an individual to make contributions to an HSA if, among other requirements, the individual is covered under an HDHP.  An HDHP cannot, in most cases, pay for medical expenses until a minimum deductible is satisfied for that year. However, an HDHP may pay for certain preventive care benefits, defined in Code Section 223, before an individual satisfies the minimum deductible under the HDHP.  Code Section 223 states that to qualify as a preventive care benefit, the benefit must either be described as preventive care for purposes of the Social Security Act or be determined to be preventive care in guidance issued by the Department of the Treasury. 

Notice 2018-12 makes clear that benefits for male sterilization or male contraceptives do not constitute preventive care under Code Section 223. As a result, a health plan that pays for these benefits before an individual meets the minimum deductible for HDHPs will not qualify as an HDHP, and individuals who are covered under that plan will not be eligible to make contributions to HSAs. 

Some states have adopted insurance laws that require health insurance policies to provide benefits for male sterilization and/or male contraceptives without cost sharing. The IRS's position in Notice 2018-12 means these policies cannot be considered HDHPs as a matter of federal law. As a result, individuals covered under these policies are ineligible to make contributions to HSAs. 

Notice 2018-12 recognizes that employers adopted, and individuals became covered under, these health insurance policies based on the belief they were HDHPs, and individuals have, accordingly, made contributions to HSAs. As a result, the Notice provides a transition period to provide states time to change these laws and for employers and insurers to modify their benefits to exclude male sterilization and male contraception from the pre-deductible preventive benefits under their plans. These policies and plans must be modified before Jan. 1, 2020. Prior to that time, individuals covered under plans that consider these benefits to be preventive services will not be treated as failing to qualify as an eligible individual for purposes of making contributions to an HSA. However, as of Jan. 1, 2020, these plans will no longer be considered HDHPs, and individuals will no longer be able to make contributions to HSAs if they are enrolled in these plans. 

For more information about these developments, please contact Audra Ferguson-Allen, Craig Burke, Sarah Funke, Robert Gauss, Melissa Proffitt, Marc Sciscoe, Tara Sciscoe, Chris Sears, or the Ice Miller LLP employee benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances. 

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