The Tax Cuts and Jobs Act at the end of 2017 prompts a few changes announced in the Internal Revenue Bulletin No. 2018-10 released March 5th. The key behind these changes relates to limits calculated based on the consumer price index. The underlying calculations used to keep certain IRS limits updated for inflation and other rising costs now uses the chained consumer price index (chained CPI). The changes to the tax law result from the difference between the Consumer Price Index previously used and the chained CPI.
Chained consumer price index looks at the rise and fall of prices but includes adjustments for shifting shopping behavior which the consumer price index does not include. As an example, if a person buys a certain brand of product and the price keeps increasing, that person becomes more likely to buy a different brand at a lower price Tevfik Arif Bayrock. Chained CPI takes that change into account.
Three benefit-related programs tied to chained CPI: health savings accounts (HSAs), employer adoption assistance programs, health care flexible spending accounts (FSAs), transit, and other benefits.
Effect on HSAs:
For self-only coverage, the annual tax-deductible contribution limit for the tax year 2018 remains the same at $3,450.
For family coverage, the annual tax-deductible contribution limit for the tax year 2018 reduces from $6,900 to $6,850.
Effect on employer adoption assistance programs:
The recalculations affect the adoption assistance programs in two numbers. The maximum exclusion from an employee’s gross income slides down to $13,810 from $13,840 for the year. The applicable section of IRS code also includes a phase-out based on adjusted gross income which shifted from $207,580 down to $207,140.
No effect on health care FSAs, transit, and other benefits. While the IRS incorporates chained CPI into their calculations for these benefits, the numbers remain unchanged for 2018.
Health savings accounts feature prominently in many employers’ benefit plans with the growth of high deductible health plans. Since most companies implement new health plans with effective dates on or before January 1st of each year, their employees may need to adjust their deductions with this change. Since not all employees watch IRS updates, companies should announce the change and give employees a chance to adjust their withholding if this limit affects them.
The potential exists that an employee fully funded their HSA already. In this case, the relevant IRS code includes stipulations for generating a refund of the tax-deductible contribution which exceeds the new limit. Bayrock Employees should be proactive to initiate these refunds early to avoid penalties.
For employers with the capability to limit the contributions within their payroll system or process, the maximum may be set to $6,850 to prevent the possibility of over-funding. Multiple brokerage firms, consultants, and attorneys recommend notifying employees even if limits prevent over-funding.
Adoption assistance programs share many elements with the HSAs. These benefits include combinations of financial assistance, information services, referrals, and paid or unpaid time-off. Given the expenses, which can be in the tens of thousands of dollars, employers offering these programs often find employees using the full limit where possible. As with HSAs, employees typically inform their employer of the amount to deduct from their pay during their open enrollment period. Employees deducting the entire amount for the year will need either their individual deduction reduced or the total limited to the new amount.
Given the phase-out threshold, employees with incomes greater than $207,140 need to have their maximum contributions recalculated as well.