Health Savings Accounts: New Limits for 2021

June 22, 2020 | Chelsea O'Shields

The Health Savings Accounts (HSAs) contribution limits have been adjusted for inflation, as recently released by the IRS.

What is an HSA

An HSA is a savings account created exclusively for the purposes of covering “qualified medical expenses” of the account recipient. The term “qualified medical expenses” covers numerous dental and medical expenses, prescriptions, and certain over-the-counter medicines. An HSA can only be established for the benefit of an “eligible individual.” The term “eligible individual” means an individual that is not enrolled in Medicare or has other health coverage (not including dental, vision, long-term care, accident, and specific disease insurance) who is covered under a high deductible health plan. A high deductible health plan (HDHP) is one that has an annual deductible greater than a set amount as determined by the IRS.

An HSA also serves as an attractive tax-saving strategy and future planning tool. Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. For example, if a qualified individual earns $80,000 in 2019 and contributes $2,000 of that to an HSA, then the individual will only be taxed on $78,000. The $2,000 will be tax-free as long as it is spent on qualified medical expenses, as defined above. The individual cannot contribute more than a certain amount, as determined by the IRS, each year.

This annual contribution limitation and the annual deductible limitations under the tax code are adjusted annually for inflation.

Inflation adjustments for 2021 contributions and deductibles

In Revenue Procedure 2020-32, the IRS released the 2021 inflation-adjusted figures for contributions to HSAs and the HDHP deductible limitations which are as follows:

Annual contribution limitation

For the 2021 calendar year, the inflation adjusted annual contribution limitation to the HSA has increased to $3,600 and $7,200 for individuals with self-only coverage and individuals with family coverage, respectively.  For 2020, these amounts were $3,550 and $7,100, respectively.

High deductible health plan

For the 2021 calendar year, the annual deductible must be more than $1,400 and $2,800 for self-only coverage and family coverage, respectively. These amounts did not change from 2020. In addition, the annual out-of-pocket expenses cannot exceed $7,000 and $14,000 for self-only coverage and family coverage, respectively. For 2020, these amounts were $6,900 (self-only) and $13,800 (family coverage).

If you have any questions about your HSA or your employees’ HSAs, or questions on how to maximize the benefits, please contact an HHM CPAs professional.