Most annual dollar limit increases from the IRS are released near the end of the year, but Health Savings Accounts (HSA) limits come in the spring, and the IRS recently released the 2016 numbers.
HSAs are available to individuals who have a qualifying high-deductible health insurance plan, who are not enrolled in Medicare, and aren’t claimed as a dependent on someone else’s tax return. These plans have a specific deductible (in 2016, at least $1,300 for self-only coverage or $2,600 for family coverage) and a specific out of pocket limit ($6,550 for self-only coverage and $13,100 for family coverage) including deductibles, co-payments and other amounts not including premiums. In order for a high-deductible health plan to qualify, no medical coverage can be received by the individual before the deductible is satisfied (except for certain preventive care).
The great benefit of HSAs is that contributions are tax-deductible and withdrawals from the account are tax-free, as long as they’re used for qualifying medical expenses. Any unused amounts can be carried over to future years, meaning that HSAs can be used as a type of “medical IRA” – they can grow year after year and can even be invested, with earnings accruing tax-free as well. While contributions can’t be made after an individual is enrolled in Medicare, withdrawals from the account can continue to be made tax-free for qualifying medical expenses. Funding can be made by individuals and/or by employers as long as the total doesn’t exceed the annual contribution limits. Accounts can be set up through an insurance company or financial institution.
In essence, HSAs provide tax savings in three ways:
1. Tax deductions when you contribute
2. Tax-free earnings through investments
3. Tax-free withdrawals for qualified medical expenses
Contribution Limits for 2016
The contribution limit for an individual with self-only coverage will be $3,350 in 2016, and $6,750 for family coverage. Individuals age 55 and older may contribute an additional $1,000 catch up contribution each year, which can be made any time beginning in the year in which the HSA participant turns 55. For married couples, each spouse who is eligible for an HSA must open a separate account – there’s no such thing as a joint HSA.
If you’re not covered by a qualifying health plan for a full year, your HSA contributions are prorated based on each month in which you had coverage as of the first day of the month.
HSA contributions can be made as late as April 15 of the following year.
Want More Information?
IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans provides more details on the provisions of HSAs. Form 8889 (see instructions) is used to report HSA contributions on your tax return.