Health savings accounts (HSAs) provide a valuable option for saving money for medical expenses while enjoying tax advantages. However, it’s essential to remember that not everyone is eligible to contribute to an HSA, and there are IRS-imposed limits on contributions.
The annual limit for HSA contributions can vary from year to year, which underscores the importance of staying up-to-date with the latest adjustments to optimize your tax savings.
If you believe you qualify for an HSA or are potentially eligible to contribute, understanding how these accounts function and the associated limits is crucial. By doing so, you can make the most of the benefits they offer while planning for your healthcare needs.
HSA overview
Health Savings Account (HSA) is a tax-advantaged savings account designed for eligible taxpayers to set aside funds for medical expenses, offering the advantage of tax savings to offset costs.
According to Sallie Mullins Thompson, a CPA and tax strategist, HSAs are known as “triple tax-free” accounts. This means that contributions made to the account are deductible, earnings grow tax-free, and withdrawals for medical expenses are also tax-free.
Employers can also contribute to an individual’s HSA on their behalf. While these employer contributions aren’t deductible on the taxpayer’s return, they may be excluded from their gross income.
One of the significant benefits of an HSA is that it remains with the individual even if they change employers. Unlike a flexible spending arrangement, there is no deadline to utilize the funds in an HSA.
Moreover, HSAs can be used not only for immediate healthcare expenses but also as a supplement to traditional retirement savings. Sandy Gleason, vice president of industry consulting at Alegeus, a benefits administration provider, highlights the opportunity to invest the remaining funds in an HSA to grow tax-free for future expenses.
What is and isn’t covered
IRS Qualified Medical Expenses:
The IRS has a comprehensive list of qualified medical expenses, which cover various aspects of health care. These include expenses related to medical, dental, vision, and family planning services. Additionally, certain insurance premiums and health care-related travel expenses are also considered qualified medical expenses.
Exclusions from the List:
However, there are some exclusions from the list of qualified medical expenses. For instance, nutritional supplements and weight loss programs that are not prescribed by a physician are not considered eligible expenses. Similarly, aromatherapy is also excluded from the list.
Gray Areas in Eligibility:
In some situations, the eligibility of certain medical expenses may not be entirely clear-cut. For example, cosmetic procedures may be considered eligible if they are necessary to improve a deformity caused by injury, disease, or congenital abnormality. Otherwise, such procedures may not be covered under qualified medical expenses.
It’s important to stay informed about the IRS guidelines regarding qualified medical expenses to ensure that you make the right decisions when claiming deductions or using tax-advantaged accounts for medical expenses. Always consult with a tax professional if you have any doubts or uncertainties about specific medical expenses.
Penalties
Qualifying for an HSA requires having an eligible high-deductible health plan (HDHP). If you meet this criterion, you can take advantage of the tax benefits on your contributions even if you later become ineligible.
Contributing beyond the allowed limit to an HSA results in a 6% excise tax from the IRS for each year the excess contributions remain in the account. Additionally, withdrawing funds for non-qualified expenses incurs taxes on the distributions along with a 20% penalty.
However, the 20% penalty is waived if you become disabled or reach the age of 65. This exemption provides some relief for those facing financial challenges during their retirement years.
2023 HSA contribution limits
Qualifying for an HSA: To be eligible for a Health Savings Account (HSA), you need to have an eligible high-deductible health plan (HDHP). For the 2023 tax year, if you are the only one on an eligible HDHP, you can contribute up to $3,850 to your HSA. However, if you have a family plan, the contribution limit increases to $7,750.
Additional catch-up contribution: If you are 55 years or older, regardless of whether you have a self-only or family plan, you can contribute an extra $1,000 to your HSA.
Contribution limits for partial-year coverage: If you were not enrolled in an eligible HDHP for the entire year, you may only be able to contribute a portion of the allowable amount. To calculate your prorated contribution, count the months you were enrolled in an eligible HDHP on the first day of each month, divide it by 12, and then multiply that number by the total amount you could have contributed for the entire year.
Enrollment duration for maximum contributions: To contribute the maximum allowable amount to your HSA, you must be enrolled in an eligible HDHP as of December 1 of the given year. However, there is a crucial condition to note. You must maintain your HDHP enrollment for one year, from December 1 of the year you contribute to December 31 of the following year. Failure to do so may result in income taxes and a 10% penalty on those contributions.
Historical HSA contribution limits
Over the past decade, the IRS has consistently adjusted the HSA contribution limit to accommodate inflation. This means that the limit has increased each year to keep pace with rising costs and economic changes.
HSA contribution limits (2014 to 2024)
| YEAR | SELF-ONLY LIMIT | FAMILY LIMIT |
|---|---|---|
| 2024 | $4,150 | $8,300 |
| 2023 | $3,850 | $7,750 |
| 2022 | $3,650 | $7,300 |
| 2021 | $3,600 | $7,200 |
| 2020 | $3,550 | $7,100 |
| 2019 | $3,500 | $7,000 |
| 2018 | $3,450 | $6,900 |
| 2017 | $3,400 | $6,750 |
| 2016 | $3,350 | $6,750 |
| 2015 | $3,350 | $6,650 |
| 2014 | $3,300 | $6,550 |
Note that the catch-up contribution for eligible taxpayers age 55 and older has remained $1,000 throughout the same period.
What are the HSA contribution limits for 2024?
In May 2023, the Internal Revenue Service (IRS) revealed plans for a substantial rise in the annual Health Savings Account (HSA) contribution limit for the year 2024.
For the upcoming year, eligible individuals with self-only plans can contribute up to $4,150 to their HSA, while those with family plans can contribute up to $8,300. The catch-up contribution limit, designed for individuals aged 55 or older, will remain at $1,000.
This increase in the contribution limit aims to provide taxpayers with greater opportunities to save for their healthcare expenses and enjoy potential tax benefits in the process. The HSA remains a valuable tool for individuals and families to manage their medical costs more effectively.
