IRS Sets 2018 HSA Contribution Limits

The amount that individuals may contribute annually to their health savings accounts (HSAs) for self-only coverage will rise by $50 next year. For HSAs linked to family coverage, the contribution cap will rise by $150.

In Revenue Procedure 2017-37, issued May 4, the IRS provided the inflation-adjusted HSA contribution limits effective for calendar year 2018, along with minimum deductible and maximum out-of-pocket expenses for the high-deductible health plans (HDHPs) that HSAs must be coupled with.

These rate changes reflect cost-of-living adjustments, if any, and rounding rules under Internal Revenue Code Section 223.

"The contribution limits for various tax advantaged accounts for the following year are usually announced in the fall, except for HSAs, which come out in the spring," explained Harry Sit, CEBS, who edits The Financial Buff blog. Due to a mild uptick in inflation and rounding rules, the 2018 HSA limit will have small increases, he noted.

A comparison of the 2018 and 2017 limits is shown below:

"Employers should consider these limits when planning for the 2018 benefit plan year and should review plan communications to ensure that the appropriate limits are reflected," advised Damian A. Myers, a labor and employee benefits attorney with Proskauer in Washington, D.C.

Age 55 Catch Up Contribution

Account holders who will be 55 or older by the end of year can contribute an additional $1,000 to their HSA. "If you are married, and both of you are age 55, each of you can contribute additional $1,000," Sit said. But there's a catch, he added.

An HSA is in an individual's name—there is no joint HSA even when the plan provides family coverage—so only an account holder age 55 or older can contribute the additional $1,000 in his or her own name. "If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts if they want to contribute the maximum," Sit said.

[SHRM members-only HR Q&A: Are employer contributions to an employee's health savings account (HSA) considered taxable income to the employee?]

Not All High-Deductible Plans Are HSA Eligible

Besides a high deductible, to qualify as an HDHP, a health insurance plan must not offer any benefit beyond preventive care before those covered by the plan (individuals or families) meet their annual deductible. "An otherwise high deductible plan fails the HSA qualification when it tries to be nice and it gives you some benefits before you meet the deductible," Sit explained. For instance, if the plan provides coverage in the following areas before the individual or family satisfies their deductible, it is not HSA-eligible.

• Prescription drugs. Plans may not cover nonpreventive prescription drugs with only a co-pay before an individual or family meets the annual deductible.
  
  
• Office visits. Excluding preventive care such as physical checkups or immunizations, plans may not cover office visits with only a co-pay, without having to meet the annual deductible first.
  
  
• Emergency. Plans may not cover emergency services with a co-pay outside the deductible.
  

Besides the minimum deductible, the out-of-pocket maximum of an HSA-eligible plan also can't be higher than an inflation-adjusted number published by the IRS every year. "If your plan has a high deductible and a high out-of-pocket maximum, higher than the IRS published number, it's also not HSA-eligible," Sit said.

Coverage of Adult Children

While the Affordable Care Act (ACA) allows parents to add their adult children (up to age 26) to their health plans, the IRS has not changed its definition of a dependent for health savings accounts. This means that an employee whose 24-year-old child is covered on her HSA-qualified health plan is not eligible to use HSA funds to pay that child's medical bills.

If account holders can't claim a child as a dependent on their tax returns, then they can't spend HSA dollars on services provided to that child. Under the IRS definition, a dependent is a qualifying child (daughter, son, stepchild, sibling or stepsibling, or any descendant of these) who:

• Has the same principal place of abode as the covered employee for more than one-half of the taxable year.
• Has not provided more than one-half of his or her own support during the taxable year.
  
• Is not yet 19 (or, if a student, not yet 24) at the end of the tax year, or is permanently and totally disabled.
  

Affordable Care Act Limits Differ

There are two sets of limits on out-of-pocket expenses that employers should keep in mind, which can be a source of confusion.

Starting in 2015, the Department of Health and Human Services (HHS) established annual out-of-pocket or cost-sharing limits under the ACA, applying to essential health benefits covered by a plan (grandfathered plans are not subject to the ACA's cost-sharing limits).

The ACA's annual out-of-pocket maximums have been slightly higher than the IRS's out-of-pocket limits on HSA-qualified HDHPs. To qualify as an HDHP, a plan must comply with the lower out-of-pocket maximum for HDHPs.

HHS published its 2018 ACA out-of-pocket limits in the Federal Register on Dec. 22, 2016, in its Notice of Benefit and Payment Parameters for 2018 final rule.

"The ACA requires the out-of-pocket maximum to be updated annually based on the percent increase in average premiums per person for health insurance coverage," explains an ACA compliance bulletin by the Stellar Benefits Group in Solon, Ohio, which provides an overview of the HHS's 2018 updates.

Below is a comparison of the two sets of limits.

Beginning in 2016, the ACA's self-only annual limit on cost-sharing applies to each covered individual, regardless of whether the individual is enrolled in self-only coverage or family coverage.

Health Care Legislation and HSAs

"HSA limit increases are currently tied to inflation, but with HSAs slated to play a pivotal role in health care reform, contribution limits may soon be uncoupled from traditional inflation increases and will give Americans much greater capacity for care-related tax savings," noted Harrison Stone, general counsel at ConnectYourCare, a Baltimore-based HSA services provider.

The American Health Care Act, as passed on May 4 by the U.S. House of Representatives, would nearly double annual HSA contribution limits above the current contribution limits shown above, making the cap equal to the out-of-pocket maximums that apply to high-deductible health plans.

The legislation, which faces an uncertain future in the Senate, also would allow spouses age 55 or older to make catch-up contributions to the same HSA.

GOP’s Health Care Bill Highlights an HSA Political Divide, SHRM Online Benefits, March 2017

New Law Lets Small Employers Use Stand-Alone Health Reimbursement Arrangements, SHRM Online Benefits, December 2016

Health Care Consumerism: HSAs and HRAs, SHRM Online Benefits, May 2016

Address HSA Misconceptions During Open Enrollment, SHRM Online Benefits, October 2016

HSA Tax Benefits Often Overlooked, SHRM Online Benefits, July 2016

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