March 22, 2019 Substantive Law

Recent Trends in Health Savings Account Limits

By Ima E. Nsien

Reprinted with permission from The Health Lawyer, February 2019 (31:3), at 14-15. ©2019 by the American Bar Association. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Health Savings Accounts (“HSAs”) established in connection with employment-based group health plans are typically structured to avoid the reach of The Employee Retirement Income Security Act of 1974 (“ERISA”),[1] unlike the health plans they accompany. An HSA is a tax-exempt trust or custodial account that eligible individuals covered under a high deductible health plan (“HDHP”) can set up with a qualified HSA trustee to use pre-tax contributions to pay or reimburse certain medical expenses incurred.[2] Due to the HSA’s favorable tax status, HSA holders are eligible to claim tax deductions for contributions made and earn tax-free interest on HSA assets, among other benefits.

The U.S. Department of Labor (“DOL”) administers ERISA and previously issued guidance in April 2004 regarding the applicability of ERISA to HSAs.[3] The DOL stated unequivocally that HSAs “meeting the conditions of the safe harbor for group or group-type insurance programs” are not employee welfare benefit plans subject to ERISA.[4] However, the tax implications of HSAs bring them under the purview of the Internal Revenue Service (“IRS”), and reaping the tax-free benefits of HSAs requires strict adherence to IRS regulations. This article discusses recent changes to contribution limits attributable to HSAs for family coverage.

HSA Contributions

Under the Internal Revenue Code of 1986, as amended (“Code”), an eligible individual with family coverage under an HDHP can contribute a certain amount of funds into a HSA every tax year.[5] That individual may then take as a deduction for the taxable year an amount equal to the aggregate annual contribution he or she made to the HSA during the same taxable year.[6] Every year, the IRS, an agency of the United States Treasury, releases a revenue procedure designed to set inflation-adjusted limits to HSA contributions. In April 2016, the IRS issued Revenue Procedure 2016-28, setting the 2017 inflation-adjusted annual limitation on deductions for individuals with self-only and family coverage under an HDHP.[7] The annual limitation for family coverage was set at $6,750, which was no change from the 2016 limit. On May 22, 2017, the IRS announced the 2018 inflation-adjusted annual limitation on deductions in Revenue Procedure 2017-37.[8] The annual limitation for family coverage was set at $6,900, which reflected an increase of $150 over 2016-2017 levels. As they had in years prior, individuals, employers and HSA administrators relied on this figure going into 2018, many choosing to maximize their HSA contributions for the coming year.

Changes to Inflation Measures: CPI vs. Chained CPI

However, tax reform legislation enacted late 2017, the Tax Cuts and Jobs Act,[9] made changes to how the IRS must calculate inflation adjustments. In the past, the Code used a traditional Consumer Price Index (“CPI”) measure issued annually by the DOL to determine the general increase in the prices of goods and services, or inflation. Under the CPI, inflation was computed by “multiplying the percentage price change for each item that people purchase by that item’s share of consumer spending in a period before the prices changed and then adding up those changes for all items.”[10] The actual cost-of-living increase, however, tended to be lower than the rate of inflation as measured by the CPI. The CPI tends to overestimate inflation largely because it does not account for substitution bias. Namely, many consumers lessen the impact of rising prices by purchasing less of those more expensive goods or services and substituting them for goods or services that have not risen as much, or at all, in price.[11]

Under the new tax law, the Code uses chained CPI to measure inflation.[12] Chained CPI is said to account for substitution bias, and provides “a more accurate estimate of changes in the cost of living from one month to the next by using market baskets from both months, thus ‘chaining’ the two months together.”[13] The real effect of chained CPI is that it makes inflation appear lower, causing incomes to at least appear to rise faster than inflation adjustments, which pushes people into higher tax brackets more quickly and/or limits the number of people eligible for certain deductions.

Accordingly, on March 5, 2018 the IRS issued Revenue Procedure 2018-18, which inter alia adjusted the 2018 inflation-adjusted annual limitation for HSA contributions downward to $6,850.[14] The revenue procedure did not provide any explicit mechanism for those individuals who had maximized their HSA contributions to $6,900, in reliance on previous IRS guidance. Without further action, those individuals would be subject to excess contribution penalties for having contributed $50 more than the allowable contribution amount. Under the current regulatory scheme, an excess contribution is not deductible under Section 223 of the Code and the excess amount is included in the HSA owner’s gross taxable income.[15] The IRS also imposes an additional tax of six percent on excess contributions to the HSA for every year that the account remains in excess of annual limits.[16] Following the release of Revenue Procedure 201818, HSA holders found themselves having to decide on a plan of action to avoid excess contribution penalties literally overnight.

There is one way to avoid excess contribution tax liability: removal of excess contributions. IRS guidance provides that if prior to the tax filing deadline, an individual withdraws from the HSA all income attributable to the excess contribution, as well as any distributions related to such income, the six percent tax liability can be avoided.[17] However, the excess contributions are included in taxable gross income. The distributions, or income, earned on the removed contributions should also be taxed as other income. These changes trigger the HSA trustee to file revised Forms 1099-SA and 5498-SA to clarify to the government that there are no excess HSA contributions for that tax year.[18] Fortunately, for those HSA holders who made the full $6,900 contribution, a six percent tax on $50 comes to just $3, a small penalty.

IRS Transition Relief

After the release of Revenue Procedure 2018-18 in March, numerous employers, trade groups, and other stakeholders affected by the downward adjustment urged the IRS to reconsider and allow the $6,900 limit that so many had relied on to be reinstated. On April 26, 2018, the IRS released Revenue Procedure 2018-27, stating: “For 2018, taxpayers may treat $6,900 as the annual limitation on the deduction for an individual with family coverage under an HDHP.”[19] In reinstating the $6,900 contribution limit, the IRS cited the fact that many individuals had already made the maximum HSA contribution for the 2018 year prior to the $50 reduction in the deduction limitation. Also, stakeholders effectively persuaded the government that the costs of making modifications to reflect the reduced contribution amount would be significantly greater than any tax relief associated with an excess HSA contribution. The Treasury Department and IRS thus determined “it is in the best interest of sound and efficient tax administration to allow taxpayers to treat the $6,900 annual limitation originally published in Rev. Proc. 2017-37 as the 2018 inflation adjusted limitation on HSA contributions for eligible individuals with family coverage under an HDHP.”[20]


Despite the IRS’ temporary decision to reduce 2018 HSA contribution limits for eligible individuals with family coverage to $6850 from $6900, HSA contribution limits trend upward historically. The first iteration of HSAs in 2004 allowed for eligible individuals with family coverage to contribute $5,140.[21] In May 2018, the IRS announced HSA contribution limits for 2019. For an individual with family coverage, the contribution limit will be $7,000.[22] This represents a $100 increase from 2018. Accordingly, 2019 continues the trend of rising HSA contribution limits despite the new inflation measures implemented under the Tax Cuts and Jobs Act.


1. The Employee Retirement Income Security Act (“ERISA”) is codified at Chapter 18 of Title 29 of the United States Code. ERISA sets minimum standards for most voluntarily established pensions and health plans in private industry to protect the individuals in these plans. It requires, among other things, that plans provide participants with certain information on plan features and funding and that those who manage and control plan assets maintain fiduciary responsibilities. ERISA also provides participants with standing to sue for benefits and breaches of fiduciary duty.

2. Internal Revenue Service, Publication 969 (2017), Health Savings Accounts and Other Tax-Favored Health Plans, (last visited December 9, 2018).

3. United States Dept. of Labor, Employee Benefits Security Administration, Field Assistance Bulletin No. 2004-1, (Apr. 4, 2004), visited May 1, 2018).

4. Id. at Analysis, ¶2.

5. 26 U.S. Code § 223(b)(2)(B).

6. Id. at § 223(a).

7. Internal Revenue Service, Revenue Procedure 2016-28, (April 29, 2016), (last visited May 1, 2018).

8. Internal Revenue Code, Revenue Procedure 2017-37, (May 22, 2017), (last visited May 2, 2018).

9. Tax Cuts and Jobs Act, Dec. 22, 2017, Public Law 115-97; see also Internal Revenue Code, Revenue Procedure 2018-10: Section 2. Changes, ¶3, (March 5, 2018), (last visited May 2, 2018).

10. McClelland, Rob, “Differences Between the Traditional CPI and the Chained CPI,” (last visited August 2, 2018).

11. Id.

12. Changes under the new tax law may be found in Revenue Procedure 2018-18. See Internal Revenue Code, Revenue Procedure 2018-18: Section 2.Changes, ¶3, (March 5, 2018), (last visited May 2, 2018).

13. McClelland, Rob, “Differences Between the Traditional CPI and the Chained CPI,” (last visited August 2, 2018).

14. Internal Revenue Code, Revenue Procedure 2018-18, (March 5, 2018), (last visited May 2, 2018).

15. 26 U.S. Code § 223(f)(2), (3)(B).

16. 26 U.S. Code § 4973(a), (g).

17. See Internal Revenue Service, Publication 969 (2017), p.7, (last visited December 8, 2018.)

18. See Internal Revenue Service, Publication 969 (2017), p.7, (last visited December 8, 2018.)

19. Internal Revenue Code, Revenue Procedure 2018-27, (April 26, 2018), (last visited August 2, 2018).

20. Id.

21. Internal Revenue Service, Notice 2004-2 (2004), p.5, (last visited December 8, 2018.)

22. Internal Revenue Service, Revenue Procedure 2018-30 (May 2018),
(last visited December 8, 2018.)

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Ima E. Nsien is an associate in the Health Care Litigation and Disputes practice group at Polsinelli, LLP in Los Angeles, California. Her practice focuses on civil litigation and regulatory compliance matters with an emphasis in health care law. She can be reached at