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The 1985 cult teen movie Better Off Dead includes a running gag where an aggressive paperboy antagonizes the movie’s teenage protagonist for $2 owed for newspapers. Throughout the film, the paperboy shows up yelling “I want my $2,” and is an irritating yet hilarious part of the movie’s allure.
It’s an annoying catch phrase that most Gen Xers can recall with a laugh. But it could also be applicable to the recent action taken by the IRS relating to funding Health Savings Accounts (HSAs) in 2018. In this instance, it’s $3, not $2, and is even more annoying than an aggressive paperboy. The IRS changed the amount a family can contribute to their HSA mid-way through the year, and it’s a hassle to fix it.
The Tax Trifecta
Financial planners, tax professionals and HR departments all strongly support the use of HSAs. In many ways, an HSA is the perfect trifecta in terms of tax benefits – you get a deduction to fund the account, the funds grow tax deferred, and withdrawals are tax free if used for qualified medical expenses.
A reflection of the continual shifting of the retirement burden from government and corporations to the individual, HSAs are great planning tools. The funds can be used to handle medical expenses throughout your lifetime, including during retirement. As a result, numerous articles and HR literature regularly promote their value and encourage Americans to fund the accounts.
In fact, while HSAs have been around for more than 10 years, the Employee Research Benefit Institute (ERBI) estimates there are now 20 million HSA accounts in the United States. In their 2017 research on HSAs through December 31, 2016, the ERBI found that 77% have been opened since 2013. Americans are getting the message that these accounts are effective and should be funded.
A Curveball From The IRS
The funding parameters started out normally for the 2018 tax year. In May 2017, the 2018 contributions to HSAs were released to the public. An individual could contribute $3,450 and a family could contribute $6,900 to their accounts. Both contribution limits announced reflected an increase of $50 from 2017 contribution rate. As we moved into 2018, participants began funding – some to the max.
Then came a curveball in the form of Internal Revenue Bulletin 2018-18 released on March 5, 2018. This Bulletin changed the family contribution limit. Suddenly the $6,900 that was going into a family’s HSA for 2018, has been reduced by $50. The change was due to the new tax law’s impact on the way inflation-related amounts are calculated.
This Bulletin seems a bit out of step and in many ways careless. Those who have already funded their HSAs for 2018 now have to remove the excess contribution by April 15, 2019, or face a 6% excise tax. On that $50 contribution, the tax is $3. Yes, you read that right — $3.
What’s An HSA Participant To Do?
If you have not yet made the maximum contribution to your HSA, you’re in luck. All you have to do is fund for $6,850 and call it a day.
But if you’ve already made the maximum contribution of $6,900, get ready to embark on a frustrating path. You have a choice on how to handle this and it really depends on how you view the new rule. Technically, you need to contact your HSA provider and remove the excess funds. However, what is not clear is whether there will be any fees to do so and if your provider is ready to make these changes. Further, on any excess earnings, you will have tax due. Finally, you have to hope your plan administrator reports it correctly on Forms 1099-SA and Form 5498-SA. If not, it will result in more frustration in order to fix the reporting.
The other option is more pragmatic – keep the excess funding and pay the excise tax. This will also be the solution for those who have already used their 2018 HSA contributions for current health care expenses. Then in the following year, apply the excess contribution to your 2019 contribution.
The Power To Fix Is Up To The IRS
Some may see this as an issue that affects only a small group. However, the ERBI estimates that while only 13% of account holders fully fund HSAs annually, there is $11.3 billion in HSA balances. So it will impact quite a few taxpayers, many of whom will be pragmatic and simply pay the excise tax and avoid spending the time, energy and perhaps a fee to their provider, to correct the overfunding.
Ideally, the IRS would issue a simple method to address the situation, e.g., clarifying that contributions prior to March 5th are permissible at $6,900, or not subject to a 6% excise tax. Whatever the decision, addressing this issue should be a priority for the IRS as Americans should be more concerned with funding retirement and healthcare than with annoying excise taxes.
In the meantime, stay tuned and follow the current rules – otherwise the IRS wants your $3.
