The IRS today released an advance version of Rev. Proc. 2018-27 to modify the annual limitation on deductions for contributions to health savings accounts (HSAs) allowed for individuals with family coverage under a “high deductible health plan” (HDHP) for calendar year 2018.
Earlier this year, the IRS released Rev. Proc. 2018-18 with changes to reflect the amendments made to the tax rate schedules and to other amounts that taxpayers will use in filing their 2018 income tax returns (to be filed in 2019).
Rev. Proc. 2018-18 updated inflation adjustments released by the IRS in October 2017, and provided an annual limitation on deductions for an individual with family coverage under an HDHP was $6,850 for 2018. This represented a $50 reduction from the limit announced in Rev. Proc. 2017-37. Read TaxNewsFlash
Today’s release—Rev. Proc. 2018-27 [PDF 18 KB]—states that for 2018, taxpayers may treat $6,900 as the annual limitation on the deduction for an individual with family coverage under an HDHP. No other changes were made to Rev. Proc. 2018-18.
Rev. Proc. 2018-27 states that an individual who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit may repay the distribution to the HSA and treat the distribution as the result of a mistake of fact, under the reasonable cause provision of Q&A-37 of Notice 2004-50. The portion that is repaid by April 15, 2019, is not included in the individual’s gross income or subject to the 20% addition to tax under section 223(f)(4), and the repayment is not subject to the excise tax on excess contributions under section 4973(a)(5). A trustee or custodian also is not required to allow individuals to repay mistaken distributions.
Alternatively, an individual who receives a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 deduction limit and who does not repay the distribution may treat the distribution under the rules of section 223(f)(3)—i.e., the excess contribution generally would not be included in gross income, or subject to the 20% addition to tax, provided that the distribution is received on or before the last day for filing the individual’s income tax return for 2018. This treatment does not apply to distributions from an HSA that are attributable to employer contributions (e.g., “cafeteria plan” elections) if the employer does not include any portion of the contributions in the employee’s wages because the employer treats $6,900 as the annual limitation on deductions. In this situation, unless the distribution from the HSA is used to pay qualified medical expenses, the distribution is includible in the employee’s gross income under section 223(f)(2) and is subject to the 20% addition to tax under section 223(f)(4).
Read a related IRS release—IR-2018-107.
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.