Health Savings Accounts (HSAs) were established by federal law in December 2003 when President Bush signed the Medicare Prescription Drug Improvement and Modernization Act of 2003. HSAs are tax-free financial accounts that offer another way to help individuals save for future health care expenses. To open an HSA, you must have a high deductible health plan (HDHP). To qualify as a HDHP in 2017, a plan must have a minimum annual deductible of $1,300 for self-only coverage (the same as for 2016), or $2,600 for family coverage (also the same as for 2016). The maximum out-of-pocket expenses permitted for a HDHP is $6,550 for self-only coverage and $13,100 for family coverage.
Employers looking to lower their health care costs encouraged employees to sign up for a HDHP paired with an HSA, but many were initially reluctant to try something new. However, it seems folks have come to appreciate the HSA for the triple tax break it offers. Contributions are sheltered from income taxes, assets grow tax-deferred and funds can be withdrawn tax-free for qualified medical expenses.
Now, according to a study by the 401(k)-provider Ascensus, the number of assets in HSAs has risen to $30.3 billion, a 16.7 percent increase over last year. If such growth continues, assets could reach $50 billion by 2018. The number of HSAs also increased 22 percent in 2015, with 16.7 million open accounts.
Notably, Ascensus finds that employees over age 55 account for 34 percent of HSA assets on the Ascensus platform. This suggests that employees see the accounts as they were intended, as tools to boost overall retirement savings. Fidelity estimates that a 65-year-old couple retiring in 2016 will need $260,000 to cover health care costs in retirement, in addition to expenses covered by Medicare. The HSA can be a tax-free source for these expenses.
Keep in mind that if you have an HSA, you still have until April 17, 2017, to make a contribution for 2016. If you had an HSA-eligible policy for the entire year, you can contribute up to $3,350 for individual coverage or $6,750 for family coverage (plus $1,000 if you were 55 or older in 2016). If you had an HSA-eligible policy for just the first few months of 2016, your contribution is limited based on the number of months you had the policy. However, if you had the policy on December 1, 2016, you can make the full year’s contribution even if you didn’t have the policy for the full year. But in that situation you must keep an HSA-eligible policy for all of 2017 to avoid a penalty.
In 2017, individuals will be able to contribute $3,400 to their HSA, a $50 increase from 2016. The family contribution did not change and will remain at $6,750.