$10,000 HSA Contribution in 2024? How Does That Work?

Recent headlines state that some people can contribute more than $10,000 to Health Savings Accounts in 2024. Is that figure true? To whom does it apply?

The Internal Revenue Service recently released its inflation-adjusted figures for HSA-qualified plans and Health Savings Account contributions effective Jan. 1, 2024. For the first time, it's possible for some account owners to deduct more than $10,000 from their taxable income for deposits into their Health Savings Accounts, as many headlines have noted (see here, here, and here, for example).

But who qualifies for this five-figure deduction? And who doesn't?

Let's take a look.

Eligibility to Fund a Health Savings Account

To contribute to a Health Savings Account, an owner must satisfy three requirements:

• Be covered on an HSA-qualified medical plan. In 2024, the minimum deductible is $1,600 for self-only and $3,200 for family coverage. All services except select preventive care must be applied to the deductible. The maximum out-of-pocket for covered in-network services is $8,050 for self-only and $16,100 for family coverage. On a family plan, the per-person responsibility for all in-network covered services can't exceed a yet-to-be-published figure (it's $9,100 in 2023 and will increase to about $9,800 in 2024).
• Not qualify as another taxpayer's tax dependent.
• Not have any disqualifying coverage (like Medicare or access to reimbursement through her own, a spouse's, or a parent's general Health FSA).

The New Contribution Limits

As a result of nearly 8% inflation during the most recent 12-month measuring period, contribution limits, which are indexed, rise sharply in 2024:

• Self-only coverage: $4,150 (up from $3,850 in 2023).
• Family coverage: $8,300 (up from $7,750 in 2023).
• Catch-up contribution at age 55 and older: $1,000 (not indexed for inflation).

So, how do we get to $10,000 or more? An HSA-eligible couple age 55 or older can contribute the following amounts:

• Spouse 1: $1,000 catch-up contribution into her own Health Savings Account.
• Spouse 2: $1,000 catch-up contribution into his own Health Savings Account.
• Combined: Up to $8,300 split between the two accounts as they wish.

That's a total of $10,300 in 2024. No more than $9,300 (the statutory family limit plus one $1,000 catch-up contribution) can go into either person's Health Savings Account. But a couple filing a joint income tax return or filing separately can claim a deduction of up to $10,300 (but no more than $9,300 for either if filing separately) if they contribute to the statutory limit between them and both add a catch-up contribution to their respective accounts.

In most cases, the plan subscriber will contribute $9,300 via pre-tax payroll deductions to avoid federal and state income taxes, plus payroll taxes. That way, they enjoy the immediate income-tax savings (rather than having those taxes deducted from their paychecks, making contributions outside of pre-tax payroll, and receiving credit for the tax overpayment when they file their tax return). Also, pre-tax payroll deductions aren't subject to payroll taxes (usually 7.65%, but sometimes just 1.45%, each for employee and employer). But note that residents of California and New Jersey don't receive a state income tax deduction for their contributions, whether they're funding their account with pre-tax payroll deductions or deducting their contributions when they file their tax returns.

The non-employee can deposit $1,000 of personal money to fund her catch-up contribution. She or they (if filing jointly) can then deduct that amount on their personal income tax return (they don't have to itemize their deductions to receive this benefit) to recoup federal and state (except California and New Jersey) income taxes paid, but not payroll taxes.

Illustrating These Key Points

If you're enrolled on a family plan, you can contribute up to the statutory family maximum (the $8,300), even if you're the only person on the plan who's HSA-eligible.

Example 1: Chris and Kyle are covered on Chris's employer's HSA-qualified plan. Kyle also is enrolled in Medicare. Chris is the only family member who's HSA-eligible. But the coverage is still a family plan, so Chris can deposit the full $8,300 family contribution into his account (plus the $1,000 catch-up contribution).

If you drop to self-only coverage, however, you can contribute only the self-only maximum.

Example 2: Because Kyle is paying Medicare premiums, she decides to drop off Chris's company's plan effective July 1, 2024. Chris changes to self-only coverage. For the final six months of 2024, Kyle can contribute only up to the self-only maximum for those final six months of the year (no more than $2,150 - half of the $4,300 statutory limit - for July through December). Kyle can contribute up to $500 (half the $1,000 annual maximum) as a catch-up contribution.

Also, note that if the employee who carries the company coverage is not eligible to fund a Health Savings Account and someone else on the plan is, the other person can contribute up to the family limit.

Example 3: Kyle carries the family's insurance, but he also has TRICARE coverage that he earned when he served in the armed forces. He can't contribute to a Health Savings Account. Chris, who is not enrolled in Medicare in this version of the example, can contribute up to the $8,300 family maximum, plus a $1,000 catch-up contribution. But these contributions will be from personal funds - from Chris, Kyle, or anyone else - so they're tax-deductible rather than pre-tax.

Impact

Placing $9,300 into one Health Savings Account has an immediate impact. According to Devenir Research's 2022 Year-End HSA Market Statistics & Trends Executive Summary (see bottom graph on Page 4 here), depositing that amount and not spending it would immediately put a new account among the top 8% of all Health Savings Accounts balances.

Contributing to the increasing statutory limit in future years can yield even more impressive results. Consider a couple who contribute up to the statutory maximum to a Health Savings Account from age 55 through age 64, a period of 10 years. We assume that inflation drops to 4% for three years, then declines to 3% (a very conservative projection) to anticipate future statutory contribution limits. And we assume that the account grows at 3% annually - a figure far below historic market returns, but reflecting a more conservative investment strategy.

If the couple doesn't make any distributions - paying qualified expenses with personal funds - the balance at age 70 would be just over $155,000. If they stopped investing (and thus the balance would no longer grow) and began to withdraw an average of $15,000 annually then, their money would last a full decade - to age 80.

The permanently higher contribution limits - even if inflation abates in the immediate future, as we optimistically project in this model - allow even new Health Savings Account owners to save a lot of money to cover their qualified Medicare premiums . . . Medicare cost-sharing. . . medical, dental, and vision expenses not covered by Medicare . . . and over-the-counter drugs, medicine, equipment, and supplies.

As a bonus, those withdrawals aren't subject to Required Minimum Distributions and aren't included in their modified adjusted gross income. What does that mean? These withdrawals - unlike distributions from a tax-deferred 401(k) plan or an IRA, or a payment from a pension - won't potentially raise their Medicare Part B and Part D premiums or lead to an increase in the percentage of their Social Security benefit included in taxable income.

Not All Good News

Although greater tax savings benefits hard-working American families, this benefit come at a price. Historically, annual medical spending has increased at about double the rate of general prices (though often with a lag). So, although you'll be able to reduce taxable income further, your expenses (beginning with Medicare Part B and Part D premiums and Medicare deductibles) will increase as well, and probably faster than contribution limits rise.

The Bottom Line

Figures like $10,000 grab attention. Perhaps it will spark interest among employees and non-group plan buyers who haven't enrolled in an HSA-qualified plan, HSA-qualified plan enrollees who are eligible but haven't opened or funded an account, and owner-contributors who are reimbursing every expense from their account (rather than paying bills with personal funds to preserve Health Savings Account balances) or aren't investing their balances to maximize their long-term spending power.

Only time will tell whether the growth of Health Savings Accounts and account balances during the past nearly two decades has been impressive. The higher contribution limits may accelerate these trends.

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The content of this column is informational only. They are not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.