Health Savings Accounts, or HSAs, are growing in popularity among people who need insurance and employers looking to save on costs. What exactly is a health savings account, and what are the HSA contribution limits for each calendar year?
What is a Health Savings Account?
Health Savings Accounts are a type of savings account specifically for health care spending. These HSAs are tied to the use of a High Deductible Health Plan (HDHP) for health insurance. A plan may qualify as a HDHP if the deductibles are $1,350 per year or higher for individuals, or $2,700 per year or higher for family plan.These deductibles are typically higher than average, hence the name, High Deductible Health Plan.
Advantages of HDHPs. Many people choose these policies because they typically have lower monthly premiums due to the high deductible. Many employers offer these HDHP plans for the same reasons. The goal of the higher deductibles is to save costs for everyone, incentivize policy holders to become smarter with their healthcare spending, and give you the option of setting aside money pre-tax to pay for healthcare.
Tax advantages of Heath Savings Accounts. You can set aside pre-tax income in an HSA for use specifically on health spending. HSAs are often compared to and confused with Flexible Spending Accounts (FSAs). The two are similar in that you set aside pre-tax income for health costs, but FSAs have a serious downside that HSAs do not. With an FSA if you do not spend all of the funds in your account by the end of the year you forfeit the remaining balance of your account to the plan administrator. With a Health Savings Account you never lose the funds. In fact, you could set aside money this year in an HSA and use it 40 years from now (some people even pay for their health care out of pocket now, and use their HSAs as another way to save for retirement). And as long as the funds are used for healthcare spending, you won’t pay any tax on the withdrawals.
2018 HSA Contribution Limits
How much money can you set aside for future healthcare spending with an HSA? The maximum annual contribution is dependent upon whether you are on an individual or family plan. The maximum HSA contribution limit is $3,450 per year for an individual, while families can contribute $6,900. There is also a catch up contribution limit of $1,000 for those whoa re age 55 or older (note: catchup contributions for retirement accounts start at age 50).
Here is a list of contribution limits from recent years, including the HSA contribution limits from 2010 – 2018:
|Tax Year||Individual||Family||Catch-Up Contributions
(age 55 and over)
What Happens If I Contribute Too Much to an HSA?
If you are contributing funds to your HSA automatically through payroll deductions it should be virtually impossible for you to contribute too much to your Health Savings Account. However, it is possible to over-contribute by making deposits outside of the payroll system or simply through error.
If you discover you have contributed too much to your HSA, you must taken action to avoid paying penalties to the IRS. The fix is quite simple: you must remove the excess amount contributed, plus any interest earned on that amount, and pay tax on both before April 15th of the following year. (You can contribute to this year’s HSA through April 15 of next year.) You received a tax break by putting the money into your HSA pre-tax, but since you contributed too much you technically should have paid tax on the original income.
Failure to remove the excess contribution by the April 15th deadline and then withdrawing the funds at a later date will result in a 6% excise tax when you do withdraw the funds. Additionally, if you leave the funds in indefinitely, each year you must pay the 6% tax.
However, there is one way to get out of having to remove the contribution and paying tax: leave the contribution in, but avoid the 6% excise tax by lowering the next year’s contribution by the amount of the over-contribution. For example, an individual with an HSA contribution limit of $3,400 per year would have been guilty of contributing $100 too much if they contributed $3,500 this year. They could avoid paying the 6% excise tax by only contributing $3,300 next year (the $3,400 contribution limit minus $100). If they contributed the full $3,400 next year, they would then be forced to pay the 6% tax on the original $100 over-contribution.
Can You Contribute if You Aren’t Eligible for the Entire Year? Pro-Rated Contribution Rules Explained
Rarely do you start a new job on January 1st or end it on December 31st. When you gain and lose access to a high deductible health plan will impact your availability to contribute to an HSA. If you are not active in a HDHP for the entire year your situation is a gray area. Here is what the IRS says in one of it’s instruction manuals:
Last-month rule allows eligible individuals to make a full contribution for the year even if they were not an eligible individual for the entire year. They can make the full contribution for the year if:
- They are eligible individuals on the first day of last month of their taxable year. For most people this would be December 1, and
- They remain eligible individuals during the testing period. The testing period runs from December 1 of the current year through December 31 of the following year (for calendar taxpayers).
- If the taxpayer does not qualify to contribute the full amount for the year, the contribution is determined by using the sum of the monthly contribution limits rule.
- Sum of the monthly contribution limits rule (use Limitation Chart and Worksheet in Form 8889 Instructions). This is the amount determined separately for each month based on eligibility and HDHP coverage on the first day of each month plus catch-up contributions. For this purpose, the monthly limit is 1/12 of the annual contribution limit, as calculated on the Limitation Chart and worksheet.
In other words, you can contribute the full amount if you are eligible as of Dec 1, of the calendar year. However, you may owe back taxes if you do not remain eligible from January 1 – December 31 of the following year.
To avoid tax problems, your HSA contribution can be pro-rated. Simply divide your normal contribution limit by 12 to get your monthly contribution limit. For individuals it is $283.33 and for families $562.50 (both numbers represent the 2017 tax year; just apply the current tax year to your situation). Each month that you had at least 1 day active in a HDHP counts as a full month for your contribution limit. Then simply multiply the number of months you were active in the health plan by your monthly contribution limit.
For example, an individual that started a new job and gained access to a HDHP on March 12th and maintained HDHP coverage through December 31st would have 10 months of pro-rated contribution availability. They could contribute $283.33 x 10 = $2,833.30 for the year. If they contributed the full amount of $3,300 they would need to take the steps listed above to avoid penalties for over-contributing to their HSA.
IRS Publication 969 has more info about HSA qualifications, contribution limits, distribution rules, and more.