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IRS Announces 2021 Health Contribution Limits

IRS Announces 2021 Health Contribution Limits


The Internal Revenue Service has announced new, higher contribution limits for health savings accounts for the year 2021. A person will be allowed to contribute $3, 600 for individual coverage for 2021, up from $3, 550 for 2020, or $7, 200 for family coverage, up from $7, 100 for 2020. 


While there is a COVID-19-related extended tax day deadline of July 15, 2020, an individual may still top off their health savings account contributions. It is also best to make sure that their contributions are on track for the 2020 calendar year. 


Only a few are fully embracing the potential tax savings they offer even though more and more Americans are opening up these triple-tax-advantaged accounts. There were accounts that went unfunded. According to the Employee Benefit Research Institute, there are only 6% of account holders who choose to invest the money they contribute. 


Keeping track of a savings and investing account dedicated to healthcare offers a lot of worth. Through HSA, there would still be savings whether money in the account is used for current out-of-pocket healthcare expenses, or it is invested to use it to help cover healthcare costs in retirement. 


Even on a typical trip to the CVS, you can still save through the use of an HSA. You may use the money stashed in an HSA or FSA (more on those later) for over-the-counter medications like Tylenol or Flonase as well as menstrual products like tampons and pads as a benefit from a tax relief provision tucked in the last Covid-19 stimulus package. Since it reverses Obamacare restrictions on OTC meds, it is no longer a requirement to have a doctor's prescription for them to be eligible for reimbursement. Lively, as an upstart HSA and FSA provider, has an updated list of eligible expenses here. 


According to the 2019 Year-End Devenir HSA Research Report, there were 29.4 million HSAs, holding $71.7 billion in assets as of January 2020. The data shows that contributions and asset growth have been accelerating. Investment account holders had a $16, 012 total balance on average as of year-end 2019, Devenir found. 


HSAs are commonly offered as an employee benefit by most companies. There will be money put in on a tax-free basis (usually through salary deferrals) which builds up tax-free (you can invest it), and it comes out tax free to be used for out-of-pocket healthcare expenses. 


If you're in a qualifying high-deductible health plan, you can contribute to an HSA. (For 2021, it will be those plans with a minimum annual deductible of $1, 400 for individual coverage or $2, 800 for family coverage.) You can sock away an additional $1, 000 for that year if you'll be 55 or older by December 31. The married individual with family coverage and the spouse will be 55 by the end of the year, he or she can also put away the $1, 000 catch up -- but only into his or her own HSA specifically set up to accept these contributions. Below is a link to the IRS Revenue Procedure 2020-32 with the official numbers. 


At a minimum, there should be enough money to put in your HSA to cover your annual health plan deductible. You have the option to top it off until the tax year filing deadline in case you have lowballed your annual contribution. One good example is to say that you get a big unexpected doctor's bill. You can take the money you put into your HSA right out and the government just paid maybe 25% of the bill. So you have chances of higher savings if you have a higher tax bracket. 


High-income earners can invest the money in HSA for the long haul as a savvy strategy. You'll be able to take out tax-free distributions to cover Medicare premiums upon reaching the age of 65. You pay the same tax as you would on withdrawals from pre tax 401(k) if in case the money will not be used for medical purposes. If prior years' out-of-pocket medical expenses were made and old receipts were kept, you can also take the money out tax-free as reimbursement to yourself.


Remember that healthcare FSAs (sometimes confusingly called health spending accounts) are different from HSAs. The former has lower contribution limits and is riskier because it requires you to spend the money down in one year or you forfeit it (some FSAs have $500 carryover provision). Whereas of HSAs which secure that money put on it will be yours forever: you can use the money whenever you want. Moreover, there is no option to put away money in a regular FSA if you have an HSA-eligible health plan but you can put money in a limited FSA for dental and vision care expenses only.



Daniel P Vigilante CPA and Profit Consultants
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