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WHAT IS AN HSA AND WHAT ARE THE 2021-2022 CONTRIBUTION LIMITS?

The Health Savings Account (HSA) is a type of account created in 2003 to help people save for medical expenses which anyone will tell you continue to rise.  These accounts are usually offered to individuals who opt for a high-deductible health insurance plan with their employer.

WHAT DOES AN HSA DO?

The intent of an HSA is to offer incentives to those individuals who are willing to not only choose a higher deductible health insurance plan – meaning they share in more of the costs – but also to do so by offering a tax incentive for contributing to an HSA.  If the employee opts to contribute to an HSA, they dictate to their employer’s benefits coordinators how much is to be taken out, and this money is contributed before taxes, reducing the tax liability of the individual.

Quite different from a Flex-Spending Account, which may be included in some benefits packages, money you contribute to your HSA rolls over every year – it does not expire.  This is especially beneficial since it’s your hard-earned money being contributed.

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If you are self-employed, you can still contribute to an HSA with pre-tax money.  However, it’s important to remember that, in order to set up an HSA, you must be enrolled in a high-deductible health insurance plan to do so.

All of this sounds amazing, right?  Well, the last little cherry is that the money you contribute into an HSA can earn interest, and those earnings are also tax-free.  Also, when you withdraw money from your HSA to pay for approved health expenses, those withdrawals are tax free unlike most pre-tax contribution accounts.

WHO WOULD NEED AN HSA?

Relatively speaking, if you or your family have lower medical expenses, it might be ideal to consider an HSA for several reasons.  First of all, a high-deductible health insurance plan usually comes with lower monthly premium payments.  If you don’t need to use your benefits as often, lower premiums simply make sense.  Second, the HSA can be used for anything medically related – expenses do not have to fall within your health insurance plan coverage.

WHAT QUALIFIES AS A HIGH-DEDUCTIBLE HEALTH INSURANCE PLAN?

Most health insurance companies should be able to direct you through this process, but there are minimum deductibles you must meet in order to contribute to an HSA and benefit from the tax advantages.  For individuals, the minimum deductible to qualify for an HSA in 2021 is $1,400.  The minimum is doubled for families at a minimum deductible of $2,800.

CONTRIBUTION LIMITS FOR 2021

While we’re already well into 2021, it may help to know the maximum contributions you’re allotted for the year.  For 2021, individuals can contribute up to $3,600.  Family plans are allowed to contribute up to $7,200.  The HSA plans also allow for individuals to contribute a bit above the annual limit if they did not contribute the maximum in the previous year.  This number has mostly been capped at $1,000 per year in what are called “catch-up” contribution limits.

CONTRIBUTION LIMITS FOR 2022

The HSA contribution limits for 2022 were recently announced as well.  The catch-up contributions and minimum deductibles both stay the same.  However the maximum contribution for individuals increased by $50 to $3,650, and the family contribution limit increased by $100 to $7,300.

Some were hoping that the HSA contribution limits would be increased more than this in response to families still struggling after the Covid-19 pandemic.  However, the modest increases are simply there to accommodate expected inflation.

CONCLUSION

The HSA is an excellent savings account specifically meant for health-related expenses, and the contributions are tax free.  While it decreases a person’s or family’s tax liability, the withdrawals are also tax-free and can potentially earn interest.

The contribution limits for those qualifying for HSA accounts increased, but some were expecting the increase to be more substantial.

 
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