IRS Announces Updated HSA Limits for 2023

The Internal Revenue Service (IRS) recently announced its annual inflation-adjusted amounts for health savings accounts (HSAs) in 2023. And as inflation surged to its highest level in decades, the IRS made more significant adjustments than previous years' adjustments.

Key Points

• HSA account holders will be able to make larger contributions in 2023, thanks to an inflation adjustment from the IRS.
• The IRS increased the 2023 individual HSA contribution limit to $3,850, up from $3,650 in 2022.
• They also increased the 2023 family HSA contribution limit to $7,750, up from $7,300 in 2022.

HSA Tax Benefits

Wait, why does the IRS care about HSAs? Great question! Many HSA account holders elect to open HSAs because of their tax advantages. Here are three tax benefits provided by HSAs:

• Taxable income can be reduced through employer and individual contributions.
• HSA investment gains are not taxed.
• HSA withdrawals are not taxed for medically qualified expenses.

2023 Contribution Limits

The IRS sets an annual limit for HSA contributions. After the contribution limit is reached, the account holder can no longer claim tax deductions for additional contributions. This contribution limit is adjusted annually for inflation.

The IRS significantly increased the 2023 contribution limits for both individuals and families.

• Individual 2023 HSA contribution limit increased to $3,850, a $200 (5.5%) increase from the previous year.
• Family 2023 HSA contribution limit increased to $7,750, a $400 (6.2%) increase from the previous year.
• The catch-up contribution limit (for account holders above 55) did not change.

These increased contribution limits will allow account holders to make larger tax deductions through their HSA. For comparison, the IRS adjustments in 2022 increased contribution limits for individuals and families by only 1.39%.

Note: Contribution limits include both employer + employee contributions. (If your employer contributes $400, that $400 counts towards your contribution limit total.)

2023 HDHP Deductible and Out-of-Pocket Limits

To qualify for an HSA, individuals must be enrolled in a high deductible health plan (HDHP) as defined by the IRS. The IRS partly defines HDHP by the categories of minimum deductibles and out-of-pocket maximums. And the IRS also adjusted these definitions for 2023.

Similar to the contribution limit updates, the IRS increased minimum deductible and out-of-pocket maximums significantly. Individual and family minimum deductibles increased by 7.14%, and out-of-pocket maximums increased by 6.38%.

Quick Review

Not sure what those terms above mean? Here's a quick review.

• ‍Deductible: Policyholders (individuals) are responsible for all costs up to the deductible. After the deductible is reached, other cost-sharing rules (e.g., co-payment and co-insurance) may apply. ‍
• Out-of-pocket: After the out-of-pocket maximum is reached, the health plan is 100% responsible for all remaining costs.

Let's summarize. Individuals are responsible for all costs leading up to the deductible. After the deductible kicks in, both parties share payment responsibility through cost-sharing rules such as co-payment. And then, after annual health care expenses reach the out-of-pocket maximum, the health insurance plan is responsible for all remaining expenses.

A Final Note

Please remember that these adjusted amounts are for the calendar year of 2023. (Don't apply these amounts for your 2022 tax returns when you file them in 2023.)

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