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.)
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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.
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