HSA Contribution Limits

HSA contribution limits, or a health savings account, have been raised for individuals for 2017 by $50. The IRS made the inflation adjustment effective for the year 2017 in Revenue Procedure 2016-28, which was issued on April 29, 2016. They also made an adjustment to the high-deductible health plans (HDHPs) concerning the minimum deductible amounts and the highest out-of-pocket expenses.

Because the inflation rate has been mild, and due to rounding rules, the contribution limits for families in 2017 will remain the same. An HSA must always be held in the name of an individual, and it cannot be held as a joint account, even when the HDHP covers a family.

Some health plans offered by employers have an “employee plus one” level, as well as coverage for individuals and families. The “employee plus one” could include an employee and child, and it would be categorized under the family coverage limits for an HSA.

Comparison between 2016 & 2017 Contribution and Out of Pocket Limits for Health Savings Account and High-Deductible Health Plans

•Individual limit for HSA contributions (employer and employee): $3400 for 2017; $3350 for 2016 – a $50 difference.

•Family limit for HSA contributions (employer + employee): $6750 for 2016 and 2017 - no change.

•Possible HSA catch-up contribution limits (for people age 55 or older): $1000 for 2016 and 2017 - no change.

•Individual HDHP minimum deductibles: $1300 for 2016 and 2017 - no change.

•Family HDHP minimum deductibles: $2600 for 2016 and 2017 - no change.

•Individual HDHP out-of-pocket maximum amounts (for co-payments, deductibles, and additional amounts, other than premiums): $6550 for both 2016 and 2017 – no change.

•Family HDHP out-of-pocket maximum amounts (for co-payments, deductibles, and additional amounts, other than premiums), family: $13100 for both 2016 and 2017 - no change.

Penalties for Nonqualified Expenses

When money from an HSA fund is used by someone under 65 for unqualified medical expenses, with the exception of those who are permanently disabled, there is a penalty of 20 percent of the money misused. The money will also be subject to income tax.

Affordable Care Act Limits Are Different

Starting with 2015, the Affordable Care Act (ACA) has caused the out-of-pocket costs and the cost-sharing limits to be a little higher than what the IRS permits for out-of-pocket limits on HDHPs that are HSA qualified. When considering raising the rates, the Department of Health and Human Services (HHS) uses a method based on the premium adjustment percentage. This figure is determined by a projection of the annual increases charged per insured employee in work-sponsored insurance programs, which is then used to change the maximum limits for out-of-pocket expenses for plans compliant with the ACA.

Health plans that are grandfathered do not fall under the limits of ACA cost-sharing. The IRS bases its decisions for the limits on out-of-pocket expenses on HDHPs with HSAs on the consumer price index.

Comparison between 2016 & 2017 Out of Pocket Limits for ACA-compliant plans and Health Savings Account-Qualified High-Deductible Health Plans

•Individual out-of-pocket limits: $7,150 for 2017 compared to $6,850 for 2016.

•Family out-of-pocket limits: $14,300 for 2017 compared to $13,700 for 2016.

•Individual out-of-pocket limits for HSA-qualified HDHPs: $6,550 for 2016 and 2017.

•Family out-of-pocket limits for HDHPs that is HSA-qualified: $13,100 for 2016 and 2017.

For any health plan to be qualified as an HDHP, it needs to fulfill the lower out-of-pocket maximum limit for HDHPs.

The final rule of the Health and Human Services’ Notice of Benefit and Payment Parameters states that, just like in 2016, the ACA’s annual limit set on cost-sharing for individual coverage in 2017 applies to all covered individuals, and it makes no difference whether they are enrolled in self-only coverage or if they have coverage for the family.

Coverage for Adult Children

ObamaCare permits children up to the age of 26 to be added to their parent’s health plans. Unfortunately, the terms have not yet been modified by the IRS as to who can use the funds in an HSA. This means that a covered child who is 24-years old on a health plan that is HSA-qualified cannot use the funds to pay for medical needs.

The IRS looks at it from the point of view that if a child cannot be claimed on their parents tax form as a dependent, the funds from an HSA are not eligible. The IRS defines a child that qualifies as a dependent as someone who is a daughter or son, a stepchild, a sibling or a stepsibling, or one of their descendants. They also must live at the same residence as the insured employee in excess of half the year and the employee must provide more than half of the child’s support during the year they are claimed as a dependent. They also must be younger than 19; or younger than 24 if they are a student, or disabled.

HSA Contribution Deadlines

Contributions to an HSA account can be made up until April 15 of the following year. A Health Savings Account (HSA) can be created up until the deadline for filing taxes without any extensions in order to qualify as tax deductible contributions.

HSA Contribution Guidelines

Anyone who is eligible may make a contribution to an HSA. When the HSA belongs to an employee, both the employee and the employer may make contributions in the same calendar year, but the total amount contributed must be less than the limits. Members of the family, as well as others, may also make contributions.

Other general rules:

•Only cash contributions are permitted.

•Contributions of property or stock are not permitted.

•Money from an HSA cannot be used for bills accumulated before the account was opened.

•Money from an Archer MSA can be rolled over or transferred to an HSA.

•Contributions in an HSA are indexed on an annual basis.

•When others make a contribution, it is tax deductible by the account owner whether or not they itemize.

•Contributions made by an employer are not taxable because they are made pre-tax.

•An employer can offer a cafeteria plan that includes HSAs.

•Earnings in an HSA accumulate tax free.

•When contributions for a full year are made but your HDHP becomes effective after January 1st, you could owe taxes and a penalty. There may be an IRS Testing Period which requires you to continue to be eligible until December 31st of the year following.

•Contributions may also need to be pro-rated if your coverage is dropped or reduced mid-year.

Limit on Contributions

The amount you can contribute to an HSA may depend on your coverage, your current age and when you become eligible, and when you become ineligible. The full legal amount of contributions can be made if you were eligible, or at least considered to be – according to the last-month rule, for the whole year and did not make any changes to your coverage.

For individuals who were not eligible the complete year, or who changed their coverage at some time in the year, the limit of your contribution is determined by whichever is greater: the limitation provided on the line 3 Limitation Chart and Worksheet found in the Instructions for Form 8889, and the maximum amount allowed to your HSA. This is based on the coverage provided for by your HDHP (either as a single, or for a family) on the first day of the last month, which generally is December 1.

The last month rule declares that if you were considered to be eligible on the first day of the last month of your tax year, which is generally December 1, then you are considered eligible for the whole year.

The same rule states that you need to remain eligible throughout a testing period. This period starts on the last month in your tax year and ends on the last day of the December following. An example would be that the testing period lasts from Dec. 1, 2016 and goes to the last day of December 2017.

If the eligibility test is not passed successfully, all money placed in your HSA must be counted as income in the year you are no longer eligible. In addition, the amount will also be subject to an additional tax of 10 percent.

The amount of money you can contribute must be reduced by the amount contributed to your Archer MSA. The amount reduced must also include any contributions made by your employer to that same account. You cannot make contributions to an HSA if you are receiving Medicare benefits.

Health Savings Account - General Information

A Health Savings Account (HSA) must be attached to a High Deductible Health Plan (HDHP) that is qualified. The purpose is to help individuals save money for qualified health and medical expenses as a retiree. The money is accumulated on a tax-free basis.

Health Savings Account - Eligibility Requirements

Being eligible to make contributions into a HSA has some specific requirements. These include:

•Be enrolled in a health plan that is HSA-qualified.

•Cannot be enrolled in a health plan not HSA qualified.

•Cannot have or be qualified to use a flexible spending account (FSA) for general purposes.

•Must not be a dependent on someone else’s tax return.

•May not be receiving Medicaid, Medicare or Tricare benefits, or be enrolled in those programs.

•May not be receiving VA benefits, or have used them, within the previous three months except for preventative care, or because of benefits related to an injury or illness that is service related.

•Cannot have first dollar coverage for health insurance before meeting the deductible amount.

•Services for preventative care do not need to be subject to deductible amounts.

•Separate coverage may be obtained that is not subject to the deductible amounts, such as vision care, dental care, accident coverage, long term care, and disability coverage,

•A flexible spending account for the limited purposes of Dental, Vision, or Dependent Care is permissible.

Health Savings Account - Distributions

You can make a one-time contribution to your HSA from a Traditional IRA, or from a Roth IRA. The amount you can contribute depends on whether you are covered as a single or as a family.

When money is distributed from your HSA, it does not get included in your income, it is not deductible from your taxes, and it will reduce the amount of the contributions you can make to your account.

Distributions from your HSA are completely tax-free when used for qualified medical bills, including:

•Insurance for long term care

•Services provided for long term care

•The continuation of health insurance coverage when required by law (such as COBRA)

•Expenses under Medicare (but not for Medigap)

•Health costs for people 65 and older

A 20 percent penalty is given when money is used for any other purpose and it will also be subject to income tax. The penalty is waived in cases of death or disability, and when distributions are for people 65 and older.

Health Savings Account - Death Benefits

When the policy owner dies, ownership of the HSA policy is transferred tax-free to the spouse, or to another beneficiary who is named, and given as estate income. 

Comparison between 2017 & 2018 Annual Contribution Limits for Health Savings Account and High-Deductible Health Plans

For individuals in 2018, there will be a hike of $50 over the contribution limits in 2017, which is now $3,400. It will become $3,450. For families, the contribution limit to a HSA will be raised by $150. The current family contribution amount is S6,750, but it will become $6,900 next year.

Excess Contributions

When contributions exceed the allowable amount to an HSA, the extra amount is subject to a fine. It does not matter whether it is by accident, or if you terminated the policy, or no longer meet the requirements established by the IRS. The amount will be taxable and the IRS may demand an excise tax of 6 percent on it. The tax will apply to every year the excess money stays in the account.  

One way to avoid the penalty if excess contributions are made is to complete a form called the Excess Contribution and Deposit Correction Request Form. This will enable you to have the excess money sent back to you.

Catch-up Contributions

Once you turn 55, you are eligible to make catch-up contributions to your HSA. You can make them in the year you turn 55.

Married couples who are eligible are allowed to make two catch-up contributions if both spouses are at least 55 years old. The spouse’s contribution must be made in a separate HSA in their own name. Catch-up contribution amounts are not indexed. Any contribution increase would mean a statutory change.

If you need help in determining whether you can benefit from an HSA, or have a question about contributions to an existing HSA, you can post your legal need on the UpCounsel’s marketplace. UpCounsel will only use lawyers who graduated from the top five percent of law schools such as Harvard Law and Yale Law, and who also have an average of 14 years of legal experience. Many of them have worked with or on behalf of such companies as Google, Menlo Ventures, and Airbnb.