Compliance April 27, 2018

IRS Reverses Change in HSA Limit

The IRS says it is reversing the change to the limitation because stakeholders informed it that implementing the $50 reduction to the limitation on HSA contributions for an individual with family coverage under an HDHP would impose numerous unanticipated administrative and financial burdens.

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The Internal Revenue Service (IRS) has issued Revenue Procedure 2018-27 which allows the $6,900 limitation as the maximum deductible health savings account (HSA) contribution for individuals with family coverage under a high-deductible health plan (HDHP) who contribute to an HSA to remain in effect for 2018.

On May 4, 2017, the Department of the Treasury and the IRS released Revenue Procedure 2017-37, which provided that the annual limitation on deductions under section 223(b)(2)(B) for an individual with family coverage under an HDHP was $6,900. Subsequently, statutory amendments by “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” enacted December 22, 2017, modified the inflation adjustments for certain provisions of the Internal Revenue Code, including the inflation adjustments under section 223.

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On March 2, 2018, the Treasury Department and the IRS released Rev. Proc. 2018-18, to reflect the statutory amendments to the inflation adjustments under the Act, reducing the annual limitation on deductions under section 223(b)(2)(B) for an individual with family coverage under an HDHP to $6,850 for 2018.

The IRS says it is reversing the change to the limitation because stakeholders informed it that implementing the $50 reduction to the limitation would impose numerous unanticipated administrative and financial burdens. Specifically, stakeholders noted that some individuals with family coverage under an HDHP made the maximum HSA contribution for the 2018 calendar year before the issuance of Rev. Proc. 2018-18, and that many other individuals made annual salary reduction elections for HSA contributions through their employers’ cafeteria plans based on the $6,900 limit. Stakeholders informed the IRS that the costs of modifying the various systems to reflect the reduced maximum, as well as the costs associated with distributing a $50 excess contribution (and earnings), would be significantly greater than any tax benefit associated with an unreduced HSA contribution (and in some instances may exceed $50).
Investing April 27, 2018

Mutual Fund and ETF Costs Continue Downward Trend

Morningstar estimates that investors saved more than $4 billion in fund fees in 2017 by continuing to gravitate toward lower-cost funds.

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Morningstar’s Annual U.S. Fund Fee Study found the asset-weighted average expense ratio across U.S. open-end mutual funds and exchange-traded funds (ETFs) was 0.52% in 2017, an 8% decline from 2016.

This 8% year-over-year decline is the largest recorded since Morningstar began tracking asset-weighted fees in 2000. Morningstar estimates that investors saved more than $4 billion in fund fees in 2017 by continuing to gravitate toward lower-cost funds. This year’s asset-weighted average expense ratio is down from 0.56% in 2016 and 0.63% three years ago.

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“This trend toward lower-cost funds should have an exponentially positive impact on investors’ returns in the future because costs compound over time and eat into investors’ nest eggs,” says Patricia Oey, senior manager research analyst for Morningstar. “Our data shows that the cheapest 20% of funds raked in nearly $1 trillion last year while the rest of the industry saw net outflows of approximately $250 billion. The message investors are sending is crystal clear—cost counts.”

The asset-weighted average expense ratio for passive funds fell to 0.15% in 2017 from 0.16% in 2016, a 7% decline. Morningstar says this reflected strong flows into the lowest-cost passive funds, as well as fee cuts by some asset managers for widely held, broad index funds.

The asset-weighted average expense ratio for active funds was 0.72% in 2017 from 0.75% in 2016. This 4% decline was the largest annual percentage decrease in more than a decade and Morningstar says it was driven primarily by large net flows from expensive funds to cheaper funds and secondarily by fee reductions.

The full study report may be downloaded from here.

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