The Internal Revenue Service has announced the annual inflation-adjusted limits on deductions for contributions to a health savings account (HSA) allowed for taxpayers with family coverage under a high-deductible health plan (HDHP) for calendar year 2021. What has changed? Let’s dive in.

What is a health savings account (HSA)?

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the U.S. who are enrolled in a high deductible health plan. HSAs are essentially like personal savings accounts used for qualified healthcare expenses. The benefits of HSAs are that the contributions employees make are tax deductible, employees don’t have to use HSA funds until they need them, and money rolls over from year to year and continues to earn interest.

What has changed for 2021?

Individuals who participate in an HDHP are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. The contribution deduction limit is subject to an annual inflation adjustment.

The 2021 annual limit on deductible contributions is $3,600 for individuals with self-only coverage under an HDHP. This is a $50 increase from 2020. The limit is $7,200 for family coverage for 2021 (a $100 increase from 2020).

Note that the limits on annual deductible are also subject to annual inflation adjustments. The lower limit on the annual deductible for an HDHP is $1,400 for self-only coverage and double that for family coverage, unchanged from 2020. The upper limit has increased however--$7,000 for self only coverage for out of pocket expenses, and $14,000 for family coverage for out of pocket expenses.

Did the CARES Act change HSAs?

As part of the Coronavirus Aid, Response and Economic Security (CARES) Act, taxpayers can use HSAs, health reimbursements arrangements (HRAs) or health flexible spending account (FSAs) to pay for over the counter medications without a prescription.

Questions on the new contribution limits? We can help.