[UPDATED - 4/27/18] What you should know about HSA contribution limit changes
UPDATED - 4/27/18. As of 4/26/18, the IRS has announced Revenue Procedure 2018-27 which states that for 2018, taxpayers may treat $6,900 (rather than $6,850) as the maximum annual family HSA contribution. It also provides guidance on how to handle distributions from an HSA, which were meant to reduce a contribution of $6,900 to $6,850. In short, this means that an individual who has received a corrective distribution may (but is not required to) repay the contribution to the HSA up to $6,900.
However, to keep you informed of these changes, we've kept the original article intact below.
As 2018 got underway, most health savings account users were under the impression that the family limit for contributions would be $6,900. But a new announcement from the Internal Revenue Service (IRS) may have thrown a wrench in the plans of those going for the biggest possible tax benefit.
HSA family contribution limit reduced to $6,850 for 2018
According to Internal Revenue Bulletin 2018-10 released in early March, changes put in place by the Tax Cuts and Jobs Act of 2017 caused the IRS to recalculate the limit. This is because the tax law applies the so-called chained "consumer price index" (more on that later!) to calculate HSA contribution limits.
However, while the family limit has been reduced by $50 for 2018, the HSA individual contribution limit will stay at $3,450.
What? Why? Price index?
Now, stay with us here. Each year, the IRS takes a look at contribution limits for FSAs, HSAs and other accounts to see if they need to be raised or lowered with inflation. This recent HSA change occurred because the government altered the way it calculates inflation adjustments.
According to BenefitsPro, the tax reform bill switched the formula for HSA contribution limits from CPI-U -- sometimes called the "chained price index" and shorthand for "Chained Consumer Price Index for All Urban Consumers."
This was replaced by CPI-W -- the "Consumer Price Index for Urban Wage Earners and Clerical Workers," which is calculated by the U.S. Bureau of Labor Statistics each month.
What's the difference between these two methods of calculation? The Bureau of Labor Statistics explains it in detail here, but here's our take on the situation.
CPI is calculated annually by looking at changes in the prices of goods and services established by the Bureau of Labor Statistics. For example, you probably paid more for milk this year than you did five years ago, because of inflation. Well, changing CPI rates reflect inflation the same way.
As opposed to the larger sample size (seen in CPI-U) that was used to calculate HSA contribution rate changes, the tax reform bill shifted to the much smaller sampling (CPI-W) which doesn't place as much emphasis on medical care prices.
The funny thing about this is, despite various GOP efforts to increase HSA contribution limits, it appears that their celebrated tax reform bill ended up reducing HSA limits for 2018. But it's no laughing matter if you made the max contribution for 2018 because you have some work ahead of you!
If I contributed $6,900 to my HSA, what do I do?
If you've made the maximum HSA contribution for 2018, don't fret, there's still time to avoid any tax penalty issues. According to Kaiser Health News, those who've made a $6,900 contribution to their accounts still have time to be reimbursed for that overage. Just ask your HSA administrator to return your $50 with any earnings that have accrued before next tax season.
But don't wait on this! If you leave your full contribution unchanged before next tax season, it directly affects your taxable income total which may result in an audit. Additionally, you'll be on the hook for a 6% penalty for exceeding the HSA maximum contribution, so the sooner you take care of this, the better!