2020 HSA Contribution Limits and Tax Rules For High deductible Health Insurance Plans and Health Savings Accounts

[Updated with latest HSA limits following new tax laws] Based on IRS figures and tax law changes, here are the latest HSA limits. 

2020 limits2019 limits2018 limits2017 limits
HSA annual contribution limitsIndividual Limit – $3,550
Family Limit – $7,100
Individual Limit – $3,500
Family Limit – $7,000
Individual Limit – $3,450
Family Limit – $6,900
Individual Limit – $3,400
Family Limit – $6,750
HSA catch-up contributions $1,000 if 55 or older $1,000 if 55 or older $1,000 if 55 or older $1,000 if 55 or older
Minimum annual deductible Individual coverage – $1,400
Family coverage – $2,800
Individual coverage – $1,350
Family coverage – $2,700
Individual coverage – $1,350
Family coverage – $2,700
Individual coverage – $1,300
Family coverage – $2,600
Maximum out-of-pocket expensesIndividual coverage – $6,900
Family coverage – $13,800
Individual coverage – $6,750
Family coverage – $13,500
Individual coverage – $6,650
Family coverage – $13,300
Individual coverage – $6,550
Family coverage – $13,100

HSAs have risen in popularity thanks to health-care and tax law changes and the increasing use of high-deductible health plans (see earlier updates below).

How Health Savings Accounts Work

Over the years, Health Savings Accounts, or HSAs, have provided a great way for individuals and families to cover the cost of medical and health care expenses that would otherwise not have been covered by their health insurance plan.Essentially, Health Savings Accounts are tax advantaged medical savings accounts that you own. The funds that you contribute to an HSA are contributed on a pre-tax basis; that is they are not subject to federal taxes when you deposit them.

Similar to IRA accounts, you can contribute to your HSA account during any calendar year, through April 15th of the following calendar year. Contribution limits are indexed to inflation every year and set by the IRS every year. The latest annual contribution limits are shown in the table above. If an individual account holder or the owner of a family HSA is age 55 or older, an additional “catch-up” contribution of $1,000 is also allowed.

These Health Savings Accounts, working in conjunction with a high deductible health insurance plans (HDHP), allowing the account holder to deposit and invest funds that can be withdrawn and used for any number of different qualified health care related expenses. The minimum annual deductibles for a HDHP are shown in the table above for self-only coverage and family coverage. This is the minimum deductible amount set on HDHP plans that employees have to cover with their HSA or personal funds. The maximum out-of-pocket limit (what you would have to pay) for HDHPs has also been provided in the table above.

In addition, any funds in your Health Savings Account that are not used during the calendar year, can be rolled over into the following year. Therefore, if funds are not used and they continue to roll over, the balance in your HSA account can grow significantly over time. This is a key advantage over the standard Flexible spending accounts (FSA),  where you have to spend your contributions in the year/period you make them or lose the funds forever.

How to Choose the Right HSA

Prior to opening your Health Savings Account, you must decide on your high deductible health care plan with a private health care provider or via your employer. But, before funding your HSA, it is important to do some research on the actual account you will be depositing your funds into. This is because not all Health Savings Accounts are alike.

First, there are many entities that offer accounts through which to fund your HSA. These include banks, credit unions, insurance companies, and other approved companies. And, similar to bank and brokerage accounts, there could be a wide array of different interest rates, fees, and requirements within your HSA account.

In addition, make sure that you read the small print to be aware of any possible hidden account fees or charges to liquidate funds. Also, know if there is a minimum balance required in your account, and if so, how much.

Watch for Penalties

When you take distributions from your HSA to use for qualified medical expenses, these distributions are excludable from your taxable gross income. This is true even if you are not eligible to make contributions your HSA.

However, if you take any distributions from your Health Savings Account that are not considered qualified medical expenses, then these distributions are includable in your gross income. And, if you are under the age of 65, you will also be subject to an additional 10% tax as a penalty.

Is a HDHP and HSA account right for me?

With the growing popularity of HDHP/HSA accounts for employers and employees many people are facing this question. Employers like and encourage employees towards these plans because they generally face a lower overall cost for providing employee coverage. While employees, especially the healthy ones like HDHP because it allows them to minimize their monthly premiums – 20 to 80% of traditional PPO plans in a lot of cases. So if you or your family expect low to minimal health care or medical expenses in the coming year then a HDHP with HSA is by far the best option for you. If you do have medical issues and expect many doctor visits then a PPO plan may be better. The best thing is to compare the two options on a spreadsheet and do the math on figuring which is the best one for you and your family.

[2012 update] Changes to Health Savings Accounts with Health Care Reform

If you already have a Health Savings Account or will be opening one soon, there are some changes on the horizon due to the newly passed Health Care Reform provisions.

One such change includes the way in which reimbursable expenses are defined for Health Savings Accounts. For example, starting in 2011, only insulin and prescribed drugs will be considered reimbursable in your HSA. Therefore, over-the-counter medications such as aspirin and other more basic medical items will no longer be considered qualified expenses for Health Savings Accounts.

Another change to be aware of is the penalty for non-qualified distributions from your Health Savings Account. Currently, the penalty tax on non-qualified HSA distributions is 10%. However, with the new Health Care Reform, as of 2011, this penalty for non-qualified distributions will go from 10% to 20%.

Even with the upcoming changes, Health Savings Accounts provide a great way for individuals and families to pay medical expenses that are otherwise not covered. These expenses could include costs for preventive and wellness related programs that could potentially save you from future illnesses and other health related issues.

[Update – Sep 2010] — The Internal Revenue Service issued guidance reflecting statutory changes regarding the use of certain tax-favored arrangements, such as flexible spending arrangements (FSAs), to pay for over-the-counter medicines and drugs. Based on the recently approved health care reform package, effective Jan. 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs). Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).

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4 thoughts on “2020 HSA Contribution Limits and Tax Rules For High deductible Health Insurance Plans and Health Savings Accounts

  1. Good summary of HSA’s from WSJ and why they offer good tax benefits……

    Make a triple play: For many people, the next order of business should be to fund a health savings account, or HSA, if one is available, says Mr. Ritter. This is a triple-tax-advantaged medical reimbursement account. Contributions reduce your taxable income, money in the account grows tax-deferred, and distributions for qualified health-care expenses are tax-free.

    Your contributions, plus any from your employer—employers put on average $600 per employee into HSAs—can total up to $3,350 (for individuals) or $6,650 (for families) in 2015. If you’re 55 or older (and not yet enrolled in Medicare) you can put in an additional $1,000. If you can pay some out-of-pocket medical expenses with other funds, you can effectively turn the account into a medical IRA.

    Money not spent in one year can be rolled over to the next, and you can take your account with you if you change jobs or retire. If you don’t need the money for medical care in retirement, you can spend it on anything you like, paying only regular income tax on the distributions. (Before age 65 you’d typically owe income tax and a 20% penalty on distributions used for nonmedical expenses.)

    To participate in an HSA, you must be enrolled in a health plan with an annual deductible of at least $1,300 (for individual coverage) or $2,600 (for family coverage) for 2015.

    For a growing number of employees, a high-deductible plan coupled with an HSA—sometimes called an “account-based” or “consumer-directed” plan—will be their only health-plan option in 2015. Others with a choice of plans will need to decide whether the account-based variety is right for them.

    A few guidelines: Consider your past and future health-care needs. Account-based plans often work well for those with scant medical expenses, but in some cases their premiums are low enough—and the tax benefits of HSAs high enough—that even someone who spends a lot on health care should consider them. Most states follow the federal tax treatment of HSAs. Some plans allow you to invest in stocks and bonds. A point of reference on expenses: One low-cost HSA administrator offers Vanguard-only funds with an average expense ratio of 0.21%.

  2. what is an MSA?? why are not FSA’s like this….because HSA seem like they are only for high income individuals

  3. One other HSA benefit — unless it has changed under the new plan — is that after age 65 the money can be used tax-free to pay for medical insurance.

  4. Other Recent HSA Changes Under the HOPE Act, to consider:

    >> Larger Contributions for Non-Highly Compensated Employees: Employers are permitted to make larger contributions to the HSAs of non-highly compensated employees than to the HSAs of highly compensated employees without violating the employer comparable contribution requirement.
    >> One-Time Rollover from FSA or HRA: Employees are allowed to complete a one-time rollover from their health flexible spending arrangements or health reimbursement arrangements to their HSAs.
    >> Maximum Contribution if Eligible During the Last Month: Individuals are permitted to contribute the maximum annual amount to their HSAs as long as they are eligible individuals during the last month of the taxable year.
    >> One-Time Rollover from IRA: Individuals are permitted to complete a one-time rollover from their individual retirement accounts to their HSAs.

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