Even though we just got into 2020, it’s time to think about HSA for 2021. The contribution limits for various tax advantaged accounts for the following year are usually announced in October, except for HSA, which come out in April or May.
The contribution limits are adjusted for inflation each year, subject to rounding rules. Because of the rounding rules, I’m able to calculate the limits based on the inflation numbers available so far. When a number is rounded to the nearest $50, it doesn’t matter whether it’s really $3,603 or $3,611. Since I started doing these calculations, my own calculations always matched 100% to the official numbers from the IRS.
HSA Contribution Limits
Employer contributions are included in these limits.
The family coverage numbers happen to be twice the individual coverage numbers in recent years but it doesn’t always have to be true. Because the individual coverage limit and the family coverage limit are both rounded to the nearest $50, when one number rounds up and the other number rounds down, the family coverage limit can be slightly more or less than twice the individual coverage limit.
Age 55 Catch Up Contribution
As in 401k and IRA contributions, you are allowed to contribute extra if you are above a certain age. If you are age 55 or older by the end of year, you can contribute additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute additional $1,000.
However, because HSA is in an individual’s name — there is no joint HSA even when you have family coverage — only the person age 55 or older can contribute the additional $1,000 in his or her own name. If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts if they want to contribute the maximum. There’s no way to hit the combined maximum with only one account.
The $1,000 additional contribution limit is fixed by law. It’s not adjusted for inflation.
Two Plans Or Mid-Year Changes
The limits are more complicated if you are married and the two of you are on different health plans. It’s also more complicated when your health insurance changes mid-year. The insurance change could be due to a job change, marriage or divorce, enrolling in Medicare, birth of a child, and so on.
For those situations, please read HSA Contribution Limit For Two Plans Or Mid-Year Changes.
You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP). You can use the money already in the HSA for qualified medical expenses regardless what insurance you have.
The IRS also defines what qualifies as an HDHP. For 2020, an HDHP with individual coverage must have at least $1,400 in annual deductible and no more than $6,900 in annual out-of-pocket expenses. For family coverage, the numbers are minimum $2,800 in annual deductible and no more than $13,800 in annual out-of-pocket expenses.
For 2021, an HDHP with individual coverage must have at least $1,400 in annual deductible and no more than $7,000 in annual out-of-pocket expenses. For family coverage, the numbers are minimum $2,800 in annual deductible and no more than $14,000 in annual out-of-pocket expenses.
Please note the deductible number is a minimum while the out-of-pocket number is a maximum. If the out-of-pocket limit of your insurance policy is higher, it doesn’t qualify as an HSA-eligible policy.
In addition, just having the minimum deductible and the maximum out-of-pocket isn’t sufficient to make a plan qualify as as HSA-eligible. The plan must also meet other criteria. See Not All High Deductible Plans Are HSA Eligible.
Contribute Outside Payroll
If you have a High Deductible Health Plan (HDHP) through your employer, your employer may already set up a linked HSA for you at a chosen provider. Your employer may be contributing an amount on your behalf there. Your payroll contributions also go into that account. Your employer may be paying the fees for you on that HSA. You save Social Security and Medicare taxes when you contribute to the HSA through payroll.
If your HDHP also covers your spouse or your adult children who are not claimed as a dependent on your tax return, they can also contribute to an HSA in their own name if they don’t have other non-HDHP coverage. They will have to open an HSA on their own with an HSA provider.
When you contribute to an HSA outside an employer, you get the tax deduction on your tax return, similar to when you contribute to a Traditional IRA. If you use tax software, be sure the answer the questions on HSA contributions. The tax deduction shows up on Form 8889 line 13 and Schedule 1 line 12.
Best HSA Providers
If you get the HSA-eligible high deductible plan through an employer, your employer usually has a designated HSA provider for contributing via payroll deduction. It’s best to use that one because your contributions via payroll deduction are usually exempt from Social Security and Medicare taxes. If you want better investment options you can transfer or rollover the HSA money from your employer’s designated provider to a provider of your choice afterwards. See How To Rollover an HSA On Your Own and Avoid Trustee Transfer Fee.
If you are not going through an employer, or if you’d like to contribute on your own, you can also open an HSA with a provider of your choice. For the best HSA providers with low fees and good investment options, see Best HSA Provider for Investing HSA Money.
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