The IRS has released Revenue Procedure 2018-18 to implement certain changes under the Tax Cuts and Jobs Act (“Act”). One of the changes affecting health and welfare plans is a change to the methodology used by the IRS to calculate cost of living increases, including certain annual contribution limits.
Background. HSA contribution limits are typically announced before the tax year to which they apply and generally remain unchanged throughout the tax year. However, the reduction in the HSA contribution limit for 2018 comes as a result of a provision contained in the Act that requires the use of a “Chained CPI” to calculate cost of living increases.
Chained CPI is a method for calculating inflation that takes into account the fact that as prices rise some consumers switch to lower priced products, thereby reducing inflation. The result is that over time the Chained CPI will produce lower cost of living increases.
2018 HSA Contribution Limit. The use of Chained CPI to calculate cost of living increases has resulted in the IRS reducing the previously released annual maximum family contribution limit to a Health Savings Account (“HSA”) from $6,900 to $6,850 in 2018.
This reduction applies immediately, which means that any family contribution to an HSA in 2018 that exceeds $6,850 will be subject to taxes and penalties. Accordingly, employees who have contributed more than the maximum amount for 2018 must request a refund of the excess contribution before the due date for their 2018 income tax filings.
The IRS provides the following confirmation about HSAs in Rev. Proc. 2018-18:
- The individual contribution limit for HSAs remains unchanged at $3,450.
- Other HSA-related limits, such as the minimum deductible for an HSA-qualified high deductible health plan (“HDHP”), maximum out of pocket limits for HSA-qualified plans, and the catch-up contribution limit, remain unchanged.
- A HDHP continues to be defined as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage, and the annual opt-of-pocket maximums do not exceed $6,650 for self-only coverage and $13,300 for family coverage.
Other Welfare Benefit Limits. Rev. Proc. 2018-18 further confirms that use of Chained CPI to calculate cost of living increases requires a reduction in certain limits applicable to Adoption Assistance Programs. For taxable years beginning in 2018, the maximum amount that can be excluded from an employee’s gross income for qualified adoption expenses is reduced from $13,840 to $13,810. And the adjusted gross income threshold after which the adoption exclusion begins to phase out is reduced to $207,140.
Although the requirement for using Chained CPI to determine inflation-related increases applies to Flexible Spending Accounts and Commuter or Transit Benefits, the 2018 limits for these benefits are not immediately impacted.