HSAs, the best way to handle healthcare expenses, come with very considerable tax benefits. To begin with, the IRS has only recently increased the annual contribution limits of HSAs for 2024: “Annual Limits on Contributions to an Individual Account in a CDHP.”
HSA Contribution Limit
A Health Savings Account (HSA) is a tax-advantaged savings account that permits individuals to set aside money to pay for qualified medical expenses.
HSAs provide a triple tax advantage: contributions are typically tax-deductible, investment earnings grow tax-deferred, and withdrawals for qualified medical expenses are tax-free.
For the tax year 2024, the IRS established the following contribution limits for HSAs: Individual Coverage: $4,150, Family Coverage: $8,300. Catch-up contributions are allowed for those over 55 years old.
HSA Contribution Limit 2024 Amount
The amount for HSA contribution limits 2024:
- Individual Coverage: $4,150
- Family coverage: $8,300
- Catch-up contribution (if over age 55): $1,000
That is to say, if there exists a catch-up limit, then the individual contribution limit is the sum of that base contribution limit plus that catch-up contribution limit.
Qualification Requirements for HSA 2024
To qualify to contribute to a Health Savings Account (HSA) during 2024, you must meet the following qualification requirements:
Eligibility for a High Deductible Health Plan
- You must have coverage under a High Deductible Health Plan (HDHP).
- Minimum Deductible: The annual deductible must not be less than:
- $1,600 for individual coverage
- $3,200 for family coverage
- Maximum Out-of-Pocket Costs: The annual limit on out-of-pocket maximums (including the deductible) shall not exceed:
- $8,050 for individual coverage
- $16,100 for family coverage
Individual Eligibility
- Other Health Coverage Not Allowed: You may not be covered by any other health plan other than a limited-purpose health plan, such as dental or vision insurance.
- You May Not Be Covered By Medicare: You cannot be enrolled in Medicare Part A or B.
- Not Claimed as a Dependent. You cannot be someone else’s dependent on that person’s tax return.
- No Health FSA with Grace Period. You may not have a Health Flexible Spending Account with a grace period.
Note: If you have a Health FSA without a grace period, you qualify for an HSA. However, you cannot contribute to both in the same year.
HSA Prorated Limit On Contributions
To maximize the tax benefit of an HSA, you need to know when the contributions are due. Generally, you can contribute up to the tax return due date for the prior year for your HSA. Therefore, generally, you will have until April 15th to contribute for the prior year.
Prorated HSA Contributions
If you were not covered by an HSA-eligible health plan during the entire year, you can only contribute a prorated amount. This reduces the amount you can contribute as you can only contribute a fraction of the yearly maximum.
How to Prorate Contributions
- Count Your Eligible Months: List all the months that you had an HSA-eligible health plan coverage beginning from the first day of every month.
- Calculate the Fraction: Divide the number of eligible months by 12.
- Multiply by Annual Limit Multiply the fraction by the annual contribution limit for your type of coverage (self-only or family).
Last Month’s Rule for HSA Contributions
Generally, it makes sense to enroll in the High Deductible Health Plan during the open enrollment period no later than Dec 1st of each year in order to make the maximum allowed contributions to the HSA plan for the year but you have to have continued the plan for at least one calendar month in the year.
There is, however, an exception to this:
- One-Year Testing Period You need to be fully covered through December 1st during the year you make full contributions all the way till December 31st following year under an HDHP.
- Early Distributions Penalty If you terminate HDHP coverage during that one year testing period you will become liable for an excess contributions income tax and also be penalized ten percent for such early distribution.
- The last-month rule has its testing period starting in the last month of your tax year and ending twelve months later. For example for those using the rule, in December 2024, the period will extend up to December 31, 2025.
- This adjustment is calculated on form 8889 part 3.
HSA Tax Penalties: Avoid These Blunders
HSA is a health savings account offering excellent tax advantages, and in case you misuse these benefits, penalties may follow.
Annual Contribution Limit Over Expenditure
- Any over-contribution above the annual maximum allowed will be subject to an excise tax of 6%.
- This will be taxed in the year of over contribution and then for each succeeding year until such excess amount has been corrected. In addition, the excess contribution is reported as taxable income.
Unqualified Use of HSA Funds
- You are also required to pay 20% of the amount withdrawn in addition to paying income tax on the distribution if you withdraw HSA funds for nonqualified medical expenses.
- However, if you are aged 65 years and above, there is an exception. Although you can withdraw funds for any purpose, you still need to pay income tax on the amount withdrawn.
- Once you know what these penalties and rules are, you will be able to get all the advantages of your HSA with minimal tax costs.
When to Contribute to Your HSA?
The deadline to contribute to your HSA is:
Individual Contributions
- You can contribute to your HSA through April 15, 2025, for tax year 2024. That deadline coincides with the usual tax filing date.
- You may be able to make HSA contributions for all of 2024 only if you are eligible the entire year, such as if you didn’t have health coverage throughout the entire year-for example, you change your health coverage.
- You can contribute for months that you were eligible during the year even if you weren’t eligible for all of 2024.
Employer Contributions
- Your employer may contribute on your behalf to your HSA for tax year 2024. Your employer must notify you and the HSA trustee that this contribution is made on your behalf for tax year 2024. The contributions will be reported on your Form W-2 for 2025.
