insurance

New Limit for Health Savings Account Contributions

Using a new measure of inflation, the IRS has reduced the amount that people with family medical coverage can contribute to a health savings account in 2018.

Question: I just saw that the 2018 HSA contribution limit for people with family coverage was reduced to $6,850, after the IRS had already announced it would be $6,900 for the year. Why did it change? If I contributed the full $6,900 already, what should I do now?

Answer: You're right. The IRS originally said the HSA contribution limit for people with family health insurance coverage would be $6,900 for 2018, but then it recalculated the inflation adjustment in early March and reduced the amount to $6,850 for the year. The family limit changed because the new tax law requires the IRS to use a different version of the Consumer Price Index (called the "chained CPI"), which has grown at a slower rate than the CPI version used in the past.

The contribution limit for family coverage is the only limit that changed with this new calculation. The maximum contribution limit for people with single coverage remains at $3,450 for 2018, and the catch-up contribution for people who are 55 or older this year remains at $1,000. (Also, this change only affects 2018 contributions. The contribution limits for 2017—which you can make until the April 17, 2018, tax-filing deadline if you had an HSA-eligible health insurance policy in 2017—remain at $3,400 for single coverage and $6,750 for family coverage.)

It's unusual for the IRS to change these contribution limits months into a new year, and HSA administrators and employers are still figuring out what they should do. If you already contributed the full $6,900, it’s a good idea to wait for a few weeks to see whether the IRS issues more clarification on your options.

As long as you withdraw the extra $50 contribution (and any earnings on it) by April 15, 2019, you won't be hit with an excess contribution penalty. (That 6% penalty would apply in each year the extra $50 remains in your account.) But the procedure to withdraw the extra funds can be tricky. You would need to make sure that your HSA administrator codes the withdrawal as a return of an excess contribution, rather than as a standard withdrawal, so that you won't have to pay income taxes plus a 20% penalty on it as a nonqualified distribution, says Roy Ramthun, president of HSA Consulting Services. You would also need to make sure to withdraw a pro-rata share of any earnings on the $50, he says.

Your HSA administrator should know more in the next few weeks about the procedure for dealing with the extra contributions. By then, the IRS may provide more guidance or even relax the rules for this year. Employers are also working with the IRS to determine the best way to update their systems so employees who contribute the maximum through payroll deduction don’t exceed the new limit by the end of the year.

Most Popular

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How
social security

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How

It’s always smart to maximize your Social Security benefits, and if you are divorced, one way to do that might be to take them based on your ex’s earn…
May 13, 2021
Updated Exclusive Social Security Benefits Forecast: COLA Likely to Jump to 4.5% in 2022
Economic Forecasts

Updated Exclusive Social Security Benefits Forecast: COLA Likely to Jump to 4.5% in 2022

This would be the largest cost-of-living adjustment for Social Security benefits since 2008.
May 12, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021

Recommended

Annuities: How They Could Work for You
Financial Planning

Annuities: How They Could Work for You

No doubt, investing in annuities can be a tough call for the active investor. But there comes a time when relinquishing some control in exchange for r…
May 6, 2021
Umbrella Insurance – Do I Need It?
insurance

Umbrella Insurance – Do I Need It?

You might think your home and auto insurance offer more than enough coverage, but if you’re wrong, one very bad day could wipe out your wealth. That’s…
May 5, 2021
Stimulus Plan Has Health Insurance Benefits, Too
Coronavirus and Your Money

Stimulus Plan Has Health Insurance Benefits, Too

The plan’s health care provisions could deliver big savings for early retirees and laid-off workers.
April 29, 2021
Surprise Medical Bills Are Coming to an End
health insurance

Surprise Medical Bills Are Coming to an End

With the No Surprises Act taking effect in 2022, patients will no longer live in fear of receiving an unexpected and exorbitant medical bill for emerg…
April 27, 2021