Reduced 2018 Tax-Free Limit Prompts Plea for IRS Relief

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By Michael Trimarchi

Employers need transition relief for tax-free health savings account contribution limits that were reduced March 5 under the new tax law, an association said April 6 in a letter to the Internal Revenue Service.

The maximum tax-free HSA contribution limit for individuals with a family high-deductible health plan in 2018 “was reduced from $6,900 to $6,850 ($50 difference),” the American Payroll Association said, adding that the change was applied retroactively to Jan. 1, 2018.

The IRS first released the 2018 contribution limits May 4, 2017, in Revenue Procedure 2017-37, but the new tax law (Pub. L. 115-97) changed how those limits are calculated. The guidance generally is issued by midyear to give employers time to adjust payroll operations, the association said. Revisions to the dollar thresholds were announced in Revenue Procedure 2018-18.

Under the tax law, the excess $50 in contributions became “reportable as taxable income requiring an adjustment by payroll departments at a cost to employers that far exceeds $50,” the association said.

Payroll operations were further complicated by whether “HSA contributions are paid by individuals in full at the beginning of the year or spread throughout the year,” the APA said. “A surprising number of accounts were fully funded at the beginning of 2018, at the $6,900 level.”

The association requested “immediate transition relief” for employer-sponsored HSA qualified plans for employees for 2018, based on guidance issued by the IRS in 2017. “This relief is necessary to significantly reduce the administrative burden on employers and their payroll departments,” the association said.

The new tax law, which was signed Dec. 22 by President Donald Trump and took effect Jan. 1, 2018, changed the consumer price index, which measures inflation related to consumer goods and service. The index is used to determine dollar thresholds in the Internal Revenue Code, including the HSA contribution limits.

The letter was addressed to David J. Kautter, acting commissioner of the IRS.

To contact the reporter on this story: Michael Trimarchi in Washington at mtrimarchi@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

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