In my case I fixed this issue by opening .iml file of project (it is located in project root folder and have name same as the name of project) and changing line <orderEntry type="jdk" jdkName="1.7" jdkType="JavaSDK" />
to <orderEntry type="jdk" jdkName="1.8" jdkType="JavaSDK" />
I had everything configured as in others answers here but by some reason Idea updated .iml file incorrectly.