The IRS recently announced the largest increase to the amount individuals can contribute to health savings accounts (HSAs) each year.
The maximum 2024 HSA contribution will be $8,300 for a family and $4,150 for an individual. Those 2024 limits compare to 2023 limits of $7,750 and $3,850 for a family and an individual, respectively.
HSA participants aged 55 and older can contribute an extra $1,000 to their HSAs. This means a married couple in which both spouses are age 55 or older can contribute a maximum $10,300 to their HSA during 2024, up from $9,750 during 2023.
According to the nonprofit Employee Benefit Research Institute (EBRI), HSAs are both misunderstood and underused by many Americans. They offer many benefits, among the most significant is a “trifecta” tax benefit as explained below. In the last 10 years leading up to retirement, a married couple could accumulate more than $100,000 in their HSA to be used to pay or to reimburse for medical expenses incurred throughout retirement.
Eligibility to Contribute to an HSA
To be eligible to contribute to an HSA, a participant must be enrolled in an HSA-qualified high deductible health insurance plan (HDHP). Each year the IRS defines what constitutes an HDHP.
For the year 2023, an HDHP is a health insurance plan with a deductible of at least $1,500 for an individual (that is, “self only” enrollment) and $3,000 for a family (that is, “self plus one” or “self and family” enrollment).
These minimum deductible limits increase for 2024 to $1,600 and $3,200 for an individual and a family, respectively. An individual enrolled in any part of Medicare (Medicare Part A, Part B, Part C or Part D) is not permitted to contribute to an HSA.
The following information is from OPM regarding HSAs and Federal Employees Health Benefits (FEHB) enrollment:
A Health Savings Account allows individuals to pay for current health expenses and save for future qualified medical expenses on a pre-tax basis. Funds deposited into an HSA are not taxed, the balance in the HSA and interest grows tax free, and that amount is available on a tax free basis to pay your qualified medical expenses, including your copays, coinsurance and deductible.
When you enroll in an HDHP, the health plan determines whether you are eligible for a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA) based on the information you provide.
Who is eligible for an HSA?
You are eligible for an HSA if you are:
• Enrolled in an HDHP and not covered by another health plan (including a spouse’s health plan, but not including specific injury insurance and accident, disability, dental care, vision care, or long-term care coverage)
• Not enrolled in Medicare
• Not in receipt of VA or Indian Health Service (IHS) medical benefits within the last three months
The FEHB program offers many types of health insurance plans, including health plans that are HDHP qualified and associated with an HSA. Employees who are currently not enrolled in an FEHB program HDHP and who are interested in enrolling in such a plan associated with an HSA for 2024 may do so during the next FEHB open season to be held from early November 2023 to early December 2023.
Tax Benefits of an HSA
HSAs offer a trifecta tax benefit, namely:
(1) All contributions made to an HSA are made with before-taxed dollars – both federal and state income taxes’ resulting in current year tax savings;
(2) All qualified withdrawals from an HSA – that is, withdrawals used to pay healthcare expenses are tax-free; and
(3) HSAs accrue earnings – interest, dividends and/or capital gains – over time and these earnings are not taxed when they are withdrawn to pay healthcare expenses.
While federal employees can make withdrawals from their traditional and Roth Thrift Savings Plan (TSP), and traditional and Roth IRAs to pay their healthcare expenses, income taxes have to be paid when withdrawals are made from the traditional TSP and traditional IRAs.
With the Roth TSP and Roth IRAs, while all qualified withdrawals are income-tax free, all contributions are made with after-taxed funds. With an HSA, there are no taxes paid on HSA contributions, there is tax-free growth on contributions within the HSA and tax-free withdrawals when the withdrawals are used to pay for eligible healthcare expenses.
Eligible healthcare expenses that can be paid via HSA withdrawals include deductibles, co-payments, coinsurance, vision, dental and hearing expenses. Also included in eligible healthcare expenses are reimbursements for Medicare Part B premiums (which during 2023 cost almost $4,000 annually for a married couple with income of up to $194,000).
Another expense that is eligible to be paid through an HSA: Long-term care (LTC) Insurance premiums. As the cost of long-term care insurance continues to skyrocket (and this includes the Federal Long-Term Care Insurance Program) many individuals are finding it difficult to pay the premiums on their LTC insurance policies. Tax-free withdrawals from an HSA can be made to help pay or to reimburse for the premiums of long-term care insurance policy.
According to Devenir Research, Americans held $112.5 billion in about 37 million HSA accounts at the end of January 2023. One other significant statistic: Americans spend nearly $400 billion annually in after-taxed out-of-pocket money to pay healthcare expenses, according to HSA provider Alegeus.
Another advantage of the HSA is that there is no annual “use or lose” requirement life there is with the other tax beneficial health savings options, the health care flexible spending account (HCFSA).
With the HCFSA in which every permanent federal employee is eligible to enroll no matter what type of health insurance plan they are enrolled in (FEHB program, a private individual health insurance plan, as part of a spouse’s private company group health plan), the employee can enroll in an HCFSA every year.
But if the funds set aside for an HCFSA are not used up by December 31, then there is a limited amount (up to $570 during 2023) that can be carried over to the following year. Otherwise, the HCFSA funds set aside will be lost. Also, with an HCFSA if a federal employee leaves or retires from federal service, any funds remaining in the HCFSA are forfeited.
With an HSA, the HSA owner keeps his or her HSA upon leaving or retiring from federal service. This is especially important for federal retirees who have out-of-pocket healthcare expenses throughout their retirement years. Two healthcare expenses can be significantly large for retirees – namely, Medicare Part B monthly premiums and long-term care insurance premiums.
It is important to emphasize that while an HSA owner once enrolled in Medicare can no longer contribute to his or her HSA, the Medicare enrollee can continue to make tax-free withdrawals from their existing HAS to pay for qualified health-care expenses including LTC insurance premiums and Medicare Part B monthly premiums.
Federal employees who are currently enrolled in a FEHB program HDHP associated with an HSA, as well as those employees who are interest in enrolling in an FEHB program HDHP associated with an HSA are encouraged to use their HSAs as a complement to their TSP and IRA as part of their overall retirement planning. With the likely continuation of increasing cost of long-term care insurance, Medicare Part B premiums and health care expenses in general, HSAs can go a long way to make retirement more affordable for federal retirees and their spouses.
- Using the TSP, IRAs and HSAs to Help Pay for Future Long-Term Care Expenses
As an expert in financial planning and tax-advantaged savings, I've closely followed the recent IRS announcement regarding Health Savings Accounts (HSAs). The changes for the year 2024 represent a significant increase in contribution limits, providing individuals and families with enhanced opportunities for tax-efficient healthcare savings.
Firstly, the IRS has set the maximum 2024 HSA contribution at $8,300 for a family and $4,150 for an individual, up from the 2023 limits of $7,750 and $3,850, respectively. Notably, HSA participants aged 55 and older can contribute an additional $1,000, allowing a married couple both aged 55 or older to contribute a maximum of $10,300 in 2024, compared to $9,750 in 2023.
These changes highlight the IRS's recognition of the importance of HSAs and their role in individuals' financial planning, particularly in the context of rising healthcare costs. According to the Employee Benefit Research Institute (EBRI), HSAs remain underutilized and misunderstood by many Americans, despite offering a range of benefits.
To be eligible to contribute to an HSA, individuals must be enrolled in an HSA-qualified high deductible health insurance plan (HDHP). The IRS defines the minimum deductible limits for an HDHP, which have increased for 2024 to $1,600 for an individual and $3,200 for a family. Importantly, individuals enrolled in any part of Medicare are not permitted to contribute to an HSA.
The tax benefits of HSAs form a compelling "trifecta":
Pre-tax Contributions: All contributions to an HSA are made with before-taxed dollars, leading to immediate tax savings.
Tax-Free Withdrawals: Qualified withdrawals from an HSA, used for healthcare expenses, are tax-free.
Tax-Free Growth: HSAs accrue tax-free earnings, such as interest, dividends, or capital gains, which remain untaxed when withdrawn for eligible healthcare expenses.
Comparing HSAs to other tax-advantaged savings options, such as Thrift Savings Plans (TSP) and IRAs, reveals unique advantages. While traditional and Roth TSPs and IRAs may have tax implications upon withdrawal, HSAs offer a more comprehensive tax-free approach to contributions, growth, and withdrawals for healthcare expenses.
Eligible healthcare expenses covered by HSA withdrawals include deductibles, co-payments, coinsurance, vision, dental, hearing expenses, and even long-term care (LTC) insurance premiums. The latter is particularly relevant given the rising costs of long-term care insurance.
As of January 2023, Americans held $112.5 billion in approximately 37 million HSA accounts, emphasizing their popularity and potential impact on individuals' financial well-being. Notably, HSAs do not have an annual "use or lose" requirement, setting them apart from other health savings options like the Health Care Flexible Spending Account (HCFSA).
In contrast to the HCFSA, where unused funds may be forfeited, HSAs provide greater flexibility, allowing HSA owners to retain their accounts even upon leaving or retiring from federal service. This is especially crucial for federal retirees facing significant healthcare expenses, including Medicare Part B premiums and long-term care insurance premiums.
In conclusion, federal employees are encouraged to leverage HSAs as a complementary element in their overall retirement planning strategy, alongside TSPs and IRAs. With the anticipated rise in long-term care insurance costs, Medicare Part B premiums, and general healthcare expenses, HSAs offer a valuable tool to enhance the affordability of retirement for federal retirees and their spouses.