A couple over the age of 55 could contribute over $10,000 in tax-free funds in 2024.
In a period marked by stubborn inflation, consumers finally got good news on Tuesday as the IRS announced historical increases to the contribution limits for health savings accounts in 2024. The tax-free contribution limits for 2024 would increase to $4,150 and $8,300 for individuals and families, respectively, marking the most significant increase ever in the history of the HSA by both amount and percentage.
The IRS also announced significant increases to deductible minimums and out-of-pocket maximums for HSA-eligible plans in 2024. We'll put these increases into historical context and explain what this means for the HSA industry.
Health savings accounts give account holders three main tax advantages: tax-free contributions, tax-free spending on eligible items, tax-free balance growth (i.e., investing). By raising HSA contribution limits, the IRS has enabled account holders to protect more of their income from payroll taxes.
HSA Contribution Limit Example
The easiest way to demonstrate this impact is with real-life numbers. Let’s consider a couple over the age of 55 with a household income of $100,000. Assuming they have a federal income tax rate of 22% and contribute the maximum amount of $10,300 in 2024, they could see savings of $2,266 in taxes. That’s not a small check.
To contribute to an HSA, the IRS requires account holders to:
On Tuesday, the IRS also announced increases to the requirements for federally defined HDHPs. The minimum deductible increased to $1,600 and $3,200 for individuals and families, respectively, and the maximum out-of-pocket increased to $8,050 and $16,100 for individuals and families, respectively.
What does that mean? In 2024, policyholders with HSA-eligible plans will have to contribute more before their insurance coverage kicks in and potentially pay more overall in a given year. Good thing they can contribute more tax-free contributions to their HSA!
The IRS makes adjustments yearly for inflation, so announcing they were increasing limits for the coming year wasn't surprising to anyone. But the size of the adjustments was noteworthy (and historical) as they were the largest in HSA history. The IRS increased the individual and family contribution limit by 7.8% and 7.1%, respectively. The next highest year? Last year.
IRS economists calculate inflation based on the chained CPI, an index that captures the current cost of goods in the economy. They apply that percentage to HSA amounts (e.g., contribution limits) and round to the nearest $50. If you want to geek out, the 26 U.S. Code § 223 (G) spells out cost-of-living adjustments. To state the obvious, it makes sense why the 2024 increases are so high. Inflation is at its highest in 40 years; the 2024 adjustments reflect it.
Note: The IRS uses the non-rounded amount from the previous year to calculate next year's adjustment. For this reason, some years may show no increase.
We reached out to industry experts for their perspectives on the adjustments. William Sweetnam is the Legislative and Technical Director of the Employers Council On Flexible Compensation (ECFC), a nonprofit organization dedicated to the advocacy, education, advancement, and innovation of tax-advantaged benefit programs (like HSAs). Here’s what William had to say about the adjustments.
Since the HSA contribution limits are based on inflation, 2024's contribution limit increases were bound to be large. This gives HSA contributors a greater opportunity to contribute to their HSA to help with the increasing costs of health care.
- William Sweetnam, Legislative and Technical Director of ECFC.
Roy Ramthun is the Founder & President of HSA Consulting, and led the U.S. Treasury Department’s implementation of HSAs after they were enacted into law in 2003. Here’s what Roy had to say about the adjustments for 2024:
For the first time, married couples where each spouse is over the age of 55 can contribute more than $10,000 combined. In their last 10 years before they turn 65, these couples could potentially put over $100,000 in their HSAs to help them pay for health care costs in retirement ... I’m hoping this puts HSAs on the radar screens of financial advisors.
- Roy Ramthun, Founder & President of HSA Consulting