HSA Limits for 2024: a guide to maximize your healthcare savings

The IRS recently announced the Health Savings Account (HSA) contribution limits for 2024, and they are higher than ever. This significant increase is partially attributed to persistently high inflation, which has led to growing costs for employees. 

Understanding HSAs

HSAs are becoming increasingly popular because of their triple tax benefits. Contributions to an HSA are made with pre-tax dollars, which means you can potentially reduce your taxable income by the amount contributed. Additionally, the money in your HSA grows tax-free, and withdrawals made for qualified medical expenses are also tax-free. 

Another advantage of an HSA is the ease with which you can pay for medical expenses. Many HSAs come with a debit card, making it convenient to pay out-of-pocket medical costs. Moreover, HSAs are portable, meaning the account and the money in it are yours, even if you change jobs. 

Despite their benefits, HSAs are often misunderstood and underutilized by many Americans. According to the Employee Benefit Research Institute (EBRI), the average HSA holder has a modest balance, contributes far less than the maximum, and does not invest their HSA funds. This means that many people are missing out on the substantial rewards HSAs offer. 

Difference between HSAs and other health-related accounts

When planning for healthcare expenses, it’s essential to understand the different types of accounts available to you, as each comes with its own benefits and restrictions. The three most common types are HSAs, Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). 

HSAs are personal savings accounts that allow you to set aside pre-tax dollars for qualified health expenses if you are eligible. HSAs are owned by the individual, not the employer, and the funds roll over year after year if not spent. In addition, the balance in an HSA can grow through investment, similar to a retirement account. 

FSAs are established by employers for their employees to contribute pre-tax dollars toward eligible healthcare expenses. Unlike HSAs, FSAs have a “use-it-or-lose-it” rule, meaning funds must be used within the plan year, or they will be forfeited, although some plans allow a limited carryover or a grace period. FSAs are not dependent on the type of health insurance plan you have. 

HRAs are employer-funded plans that reimburse employees for incurred medical expenses not covered by the company’s standard insurance plan. HRAs are solely funded by the employer, meaning employees cannot contribute to them. Unused portions may roll over for use in subsequent years, depending on the employer’s policy. 

HSA eligibility requirements for 2024

To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP). For 2024, an HDHP is defined as a health plan with an annual deductible of at least $1,600 for single coverage or at least $3,200 for family coverage. The annual out-of-pocket expenses, excluding premiums, cannot exceed $8,050 for individual coverage or $16,100 for family coverage. 

It’s worth noting that you can continue to make tax-free withdrawals from your HSA for qualified medical expenses even if you no longer have an HDHP. The funds in your HSA are yours to use for eligible medical expenses regardless of what type of health insurance you have at the time you make a withdrawal. However, without an HDHP, you will no longer be able to make new contributions to the HSA.

Likewise, any withdrawals you make for unqualified expenses may be subject to taxes and potentially a penalty, depending on your age. If you’re under 65 and make a non-medical withdrawal, you’ll be subject to income tax and a 20% penalty on the withdrawn amount. After age 65, non-medical withdrawals are subject to income tax but not the penalty. 

HSA limits for 2024

For 2024, the HSA contribution limits have increased by a considerable amount. Individuals enrolled in an HDHP can contribute $4,150, a 7.8% increase from the 2023 limit of $3,850. For family coverage, the HSA contribution limit has jumped to $8,300, a 7.1% increase from the 2023 limit of $7,750. 

If you are 55 years or older, you can contribute an additional $1,000 as a catch-up contribution. This catch-up amount remains unchanged for 2024. With the catch-up contribution included, a couple with family coverage, both aged 55 or older, can contribute more than $10,000 to their HSA in 2024. 

Tips for maximizing your HSA benefits

To fully leverage the advantages of your HSA, strategic contributions, careful use of funds, and thoughtful investing are key. 

Regular contributions to your HSA can help you budget more efficiently and potentially allow you to benefit from dollar-cost averaging in your investments. Whenever possible, aim to contribute up to the maximum limit each year. If you’re aged 55 or older, don’t forget to make additional catch-up contributions to bolster your healthcare savings as you approach retirement. 

When using your HSA funds, always keep receipts for qualified medical expenses. You might opt to pay for these expenses out-of-pocket now and reimburse yourself from your HSA later when you may need the cash more urgently. It can also be tempting to use HSA funds for minor medical bills, but if you can afford them, consider saving them for larger future health expenses, especially as you near retirement when health costs typically increase. Make sure to familiarize yourself with the broad range of expenses that qualify for HSA spending, as there are numerous non-obvious items like other-the-counter medications, mental health services, or eyeglasses that can be considered qualified expenses. 

Investing your HSA contributions can significantly enhance your healthcare savings in the long run. Consider moving your HSA funds into investments once you’ve accumulated enough to cover your short-term medical expenses and deductible. Remember, investment should always be viewed as a long-term strategy, so be prepared for potential market fluctuations and only invest if you’re comfortable with the associated risk. Diversifying your investments can help mitigate some of this risk. As with any other investment decision, it can be beneficial to seek professional advice. A financial advisor or your HSA provider can provide guidance based on your personal financial situation and objectives. 

With the 2024 HSA contribution limits now significantly higher, it presents an ideal opportunity for individuals to save more in taxes. If you have questions or would like to discuss your specific situation with one of our expert advisors, please get in touch with our office.

 

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