IRS Sets 2017 HSA Contribution Limits

Health savings account annual limit for individuals rises by $50

By Stephen Miller, CEBS May 2, 2016
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Update: For 2018 limits on health savings accounts, see the SHRM Online article IRS Sets 2018 Contribution Limits.


Aside from a modest increase of $50 in the amount that individuals may contribute annually to their health savings accounts (HSAs) for self-only coverage, HSA-related limits for 2017 are holding firm.

In Revenue Procedure 2016-28, issued April 29, the IRS provided the inflation-adjusted HSA contribution limits effective for calendar year 2017, along with minimum deductible and maximum out-of-pocket expenses for the high-deductible health plans (HDHPs) that HSAs are coupled with.

These rate changes reflect cost-of-living adjustments, if any, and rounding rules under Internal Revenue Code Section 223.

“The contribution limits for various tax advantaged accounts for the following year are usually announced in the fall, except for HSAs, which come out in the spring,” explained Harry Sit, CEBS, who edits The Financial Buff blog. “Due to mild inflation and rounding rules, the 2017 HSA contribution limit for family coverage will stay unchanged.”

A comparison of the 2016 and 2017 limits is shown below:

Contribution and Out-of-Pocket Limits
for Health Savings Accounts and High-Deductible Health Plans

 

For 2017

For 2016

Change

HSA contribution limit (employer + employee)

Self-only: $3,400

Family: $6,750

Self-only: $3,350

Family: $6,750

Self-only: +$50

Family: no change

HSA catch-up contributions (age 55 or older)*

$1,000

$1,000

No change**

HDHP minimum deductibles

Self-only: $1,300

Family: $2,600

Self-only: $1,300

Family: $2,600

Self-only: no change

Family: no change

HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums)

Self-only: $6,550

Family: $13,100

Self-only: $6,550

Family: $13,100

Self-only: no change

Family: no change

* Catch-up contributions can be made during the year by HSA-eligible participants who will turn 55 by year-end.

** Unlike other limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.



Age 55 Catch Up Contribution

HDHP enrollees who are age 55 or older can contribute an extra $1,000 "catch-up contribution" annually to their HSAs. The catch-up contribution can be made during the year (prior to their birthday) by account holders who will turn 55 by year-end.

"If you are married, and both of you are age 55, each of you can contribute additional $1,000," Sit said. But there's a catch, he added.

An HSA is in an individual account holder's name—there is no joint HSA even when the plan provides family coverage—so only an account holder age 55 or older can contribute the additional $1,000 in his or her own name. "If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts if they want to contribute the maximum," Sit said.

[SHRM members-only HR Q&A: Are employer contributions to an employee's health savings account (HSA) considered taxable income to the employee?]

'Last Month' Rule

Those covered by an HSA-eligible health plan on Dec. 1 of a given year are considered eligible individuals for the entire year and may contribute the entire year's contribution to their HSA instead of making pro rata contributions by month. This is known as the Dec. 1 or last-month rule. However, partial-year HDHP enrollees who take advantage of the last-month rule must remain eligible individuals covered by an HDHP through Dec. 1 of the following year or risk tax assessments and penalties on their prior-year HSA contributions.

Penalties for Nonqualified Expenses

Those under age 65 (unless totally and permanently disabled) who use HSA funds for nonqualified medical expenses face a penalty of 20 percent of the funds used for such expenses. Funds spent for nonqualified purposes are also subject to income tax.

Affordable Care Act Limits Differ

A frequent source of confusion are the two sets of limits on out-of-pocket expenses that employers should keep in mind.

Starting in 2015, out-of-pocket or cost-sharing limits under the Affordable Care Act (ACA) were slightly higher than the IRS’s out-of-pocket limits on HSA-qualified HDHPs. That’s because the Department of Health and Human Services (HHS) uses a premium-adjustment percentage method—based on a projection of annual increases in per enrollee employer-sponsored insurance premiums—to modify the maximum out-of-pocket limit for ACA-compliant plans. Grandfathered plans are not subject to the ACA’s cost-sharing limits. The IRS, however, uses the consumer price index to adjust its out-of-pocket limit for HSA-eligible HDHPs.

HHS published its 2017 ACA out-of-pocket limits in the Federal Register on March 8, 2016, in its Notice of Benefit and Payment Parameters for 2017 final rule.

 

2017

2016

Out-of-pocket limits for ACA-compliant plans (set by HHS)

Self-only: $7,150

Family: $14,300

Self-only: $6,850

Family: $13,700

Out-of-pocket limits for HSA-qualified HDHPs (set by IRS)

Self-only: $6,550

Family: $13,100

Self-only: $6,550

Family: $13,100


“Note that the ACA’s cost-sharing limit is higher than the out-of-pocket maximum for HDHPs. In order for a health plan to qualify as an HDHP, the plan must comply with the lower out-of-pocket maximum limit for HDHPs,” advises a legislative brief by the Stellar Benefits Group in Solon, Ohio.

The HHS’s Notice of Benefit and Payment Parameters final rule clarifies that, as in 2016, the ACA’s self-only annual limit on cost-sharing for 2017 applies to each covered individual, regardless of whether the individual is enrolled in self-only coverage or family coverage.

Coverage of Adult Children

While the Affordable Care Act allows parents to add their adult children (up to age 26) to their health plans, the IRS has not changed its definition of a dependent for health savings accounts. This means that an employee whose 24-year-old child is covered on her HSA-qualified health plan is not eligible to use HSA funds to pay that child's medical bills.

If account holders can't claim a child as a dependent on their tax returns, then they can't spend HSA dollars on services provided to that child. According to the IRS definition, a dependent is a qualifying child (daughter, son, stepchild, sibling or stepsibling, or any descendant of these) who:

  • Has the same principal place of abode as the covered employee for more than one-half of the taxable year.
  • Has not provided more than one-half of his or her own support during the taxable year.
  • Is not yet 19 (or, if a student, not yet 24) at the end of the tax year, or is permanently and totally disabled.

Related SHRM Articles:

Address HSA Misconceptions During Open Enrollment, SHRM Online Benefits, October 2016

HSA Tax Benefits Often Overlooked, SHRM Online Benefits, July 2016

Health Care Consumerism: HSAs and HRAs, SHRM Online Benefits, updated May 2016

Family Plans Must ‘Embed’ Out-of-Pocket Limits in 2016, SHRM Online Benefits, June 2015 

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