Health Savings Account Changes

By Tax Principal, Scott Syrjala

Healthcare can be a large expense for working Americans and retirees alike. Fortunately, it’s possible to set funds aside for current and future medical expenses in a tax-advantaged fashion using a Health Savings Account, or HSA.

With an HSA, the money contributed does not have to be used in the year contributions are made.  Instead, it is beneficial to contribute more funds than what will be needed in a given year so the excess can remain invested and grow within the account.

It is beneficial to maximize your contributions because HSAs have a triple tax-advantage as the money contributed goes in tax-free, grows on investments in your account tax-free, and your withdrawals are tax-free provided they are used for qualified medical expenses. Other plans such as traditional IRAs and 401(k)s do not see the same advantage as they do not have tax-free withdrawals.

The rules and limits can change from year to year as the IRS revisits them. The following are key changes coming to the Health Savings Account in 2020:

  • To qualify, you must be on a high-deductible health insurance plan. The deductible requirement in 2020 has increased by $50 for individuals to $1,400 and $100 for family coverage to $2,800.
  • The amount HSA participants can contribute to their plans is increasing. For 2020, contribution limits are increasing by $50 for individual coverage to $3,550 and $100 for family coverage to $7,100. Workers 55 and older are eligible for a $1,000 catch-up contribution in addition to whichever limit applies to them.
  • To participate in an HSA, your out of pocket maximum cannot exceed a certain threshold. In 2020, these limits will rise to $6,900 for individuals and $13,800 for family coverage.

Contributing to an HSA is a plan that should be considered as HSAs offer flexibility and give the opportunity to invest with tax-free growth. It is important to remember that health plan rules and limitations are adjusted over time, so it is important to review the changes each year.