IRS Releases 2018 COLAs for Various Health Care Benefits
In October, the IRS released the 2018 cost-of-living adjustments (COLAs) for a wide variety of tax-related limits applicable to various health care benefits. Here are some of the highlights:
Health flexible spending accounts (FSAs). For 2018, the dollar limit on employee salary reduction contributions to health FSAs will be $2,650, up from $2,600.
Qualified small employer health reimbursement arrangements (QSEHRAs). For 2018, the maximum amount of payments and reimbursements under a QSEHRA cannot exceed $5,050 for self-only coverage and $10,250 for family coverage (up from $4,950 and $10,050, respectively).
Dependent care assistance plans (DCAPs). Although the $5,000/$2,500 DCAP limit hasn’t changed (it’s a nonindexed limit), there are adjustments to some of the general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2018 tax rate tables, earned income credit amounts, personal exemption amounts and standard deduction amounts.
The child tax credit limits are also relevant when calculating the federal income tax savings from claiming the dependent care tax credit vs. participating in a DCAP.
Archer Medical Savings Accounts (MSAs). For Archer MSA–compatible high-deductible health coverage, the annual deductible for self-only coverage must not be less than $2,300 (up from $2,250) or more than $3,450 (up from $3,350), with an out-of-pocket maximum of $4,600 (up from $4,500). For family coverage, the annual deductible must not be less than $4,600 (up from $4,500) or more than $6,850 (up from $6,750), with an out-of-pocket maximum of $8,400 (up from $8,250).
Note that the Archer MSA pilot program expired at the end of 2007, which means that no new Archer MSAs can be established after that date. Many who previously had Archer MSAs have switched to Health Savings Accounts, which are generally more favorable.
Small business health care credit. For 2018, the average annual wage level at which the tax credit begins to phase out for eligible small employers will be $26,700 (up from $26,200). The maximum average annual wages to qualify for the credit as an “eligible small employer” for 2018 will be twice this amount, or $53,400 (up from $52,400).
Premium tax credit. For taxable years beginning in 2018, the following limitations on the tax for excess advance credit payments will apply for unmarried individuals (other than surviving spouses and heads of household):
- $300 for household income less than 200 percent of the federal poverty line (FPL)
- $775 for household income at least 200 percent but less than 300 percent of the FPL
- $1,300 for household income at least 300 percent but less than 400 percent of the FPL
For all other taxpayers, the limits are:
- $600 for household income less than 200 percent of the FPL
- $1,550 for household income at least 200 percent but less than 300 percent of the FPL
- $2,600 for household income at least 300 percent but less than 400 percent of the FPL
Under the Affordable Care Act (ACA), this tax is imposed if a taxpayer’s advance premium tax credit payments for health insurance bought through a Health Insurance Marketplace (also referred to as an “exchange”) for a year exceed the allowed credit.
Requirement to maintain minimum essential coverage. For 2018, the dollar amount used to determine the penalty for an applicable large employer’s failure to maintain minimum essential coverage under the ACA will be $695 (no change from 2017).
If you’re a plan sponsor or administrator with benefits limits that are changing, determine whether your plan automatically applies the latest limits or must be amended (if desired) to recognize the changes. Also, be sure to communicate any such changes to your employees.