IRS Increases 2023 HSA and HDHP Contributions

In late April, the IRS announced a significant increase in health savings account (HSA) and high-deductible plan (HDHP) contribution limits prompted by rising inflation.

Eligibility for HSAs is also changing as HDHP minimum deductibles rise.

HSA Contribution Limits Increase

Health savings accounts help Americans save money for medical expenses. A form of tax advantaged personal savings account, HSAs combine with high deductible health insurance policies to provide additional coverage.

HSA contributions are tax deductible, accumulate tax free, and are interest-bearing, so unused funds will grow over time. HSA holders can withdraw deposits at any time to cover medical expenses not covered by the HDHP for themselves or their family members. Funds roll over from one year to the next, and when the account holder reaches 65, they can withdraw the funds for other purposes without penalties.

In 2022, combined employer and employee HSA contribution limits are $3,650 for individuals and $7,300 for family plans. In 2023, these contributions will increase to $3,850 and $7,750, respectively, representing a 5.5% increase versus the previous year’s 1.4% increase. HSA catchup contributions for those 55 or older remain the same at $1,000.

Married couples can share a single plan with family coverage and a contribution limit of $7,750. If both have access to HSA eligible individual coverage, they can each contribute up to $3,850 to their separate accounts.

If both spouses are 55 or older, they will require separate accounts to each take advantage of the $1,000 catch-up contribution. If one spouse is younger and the HSA is in their name, the spouse that is 55 or older will have to open a separate account to make the $1,000 catch-up contribution.

Any deposits that exceed the contribution limits are subject to an annual 6% excise penalty tax unless the excess is withdrawn before that year’s tax deadline.

HDHP Minimum Deductibles Rise

Access to HSAs is limited to those enrolled in high-deductible health insurance plans where participants pay lower monthly premiums but cover more of their healthcare costs before the insurer steps in.

According to the IRS’s definition for 2022, a plan qualifies as an HDHP if it has a deductible of at least $1,400 for individuals and $2,800 for families. In 2023, the minimum deductibles are rising to $1,500 and $3,000, respectively.

HDHP maximum annual out-of-pocket expenses are also being adjusted from 2022’s $7,050 for individuals and $14,100 for families to $7,500 and $15,000, respectively. Out-of-pocket costs include deductibles, co-payments, and coinsurance.

Changes Prompted by Higher Inflation

Though significant, these changes shouldn’t come as a surprise. Contribution limits are adjusted every year for inflation based on the 12-month Consumer Price Index for All Urban Consumers ending on March 31. In 2020, the inflation rate was 1.3%, compared to 5.8% in 2021, which shows that increases in contribution limits are closely aligned with inflation rates. Catch-up contribution limits don’t change because they are fixed by statute.

The IRS usually releases new contribution limits for other employee benefits in October. However, HSA and HDHP limits are announced earlier, so insurers have enough time to get their plans approved by regulators.

Affordable Care Act vs. HDHP Limits

Plans compliant with the Affordable Care Act have a different set of limits on out-of-pocket expenses than pure HDHP plans. In 2023, the annual maximum out-of-pocket expenses for ACA-compliant plans will be $9,100 for individuals and $18,200 for families, up from $8,750 and $17,400.

HSA eligible high deductible health plans are available in the ACA compliant market. However, the HSA-qualified HDHP maximum out-of-pocket limits apply to these plans rather than the ACA ones. Otherwise, the plan loses its status as an HSA-compatible HDHP.

Higher Limits Represent an Opportunity

Experts consider this significant jump in HSA contribution limits as an excellent opportunity for employers to encourage their employees to start contributing to HSAs or increase their current contributions.

Even a nominal contribution of a few hundred dollars can increase employee engagement with their HSA. It also improves their perception of the value of their health benefits.