Health savings account contribution caps up $50 for self-only and $100 for family coverage
After a tumultuous year of changes in the 2018 annual contribution limits for health savings accounts (HSAs)—they weren't finalized until well into the current year—health plan sponsors should have plenty of time to prepare for the 2019 HSA contribution caps, announced by the IRS on May 10.
Next year, allowable HSA contributions for participants with self-only health coverage will rise by $50. For HSAs linked to family coverage, the 2019 contribution limit will rise by $100 above the family cap set for 2018.
The IRS recalculated the family cap downward in March after Congress revised the inflation adjustment for many employer benefit rates. In April, the IRS granted relief that restored the family cap back to the original 2018 level.
In Revenue Procedure 2018-30, the IRS has provided the inflation-adjusted HSA contribution limits effective for calendar year 2019, along with minimum deductible and maximum out-of-pocket expenses for the high-deductible health plans (HDHPs) that HSAs must be coupled with.
2019 vs. 2018 HSA Contribution Limits
|Contribution and Out-of-Pocket Limits
for Health Savings Accounts and High-Deductible Health Plans
|HSA contribution limit(employer + employee)
|HSA catch-up contributions (age 55 or older)
|HDHP minimum deductibles
|HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums)
|*The IRS originally set at $6,900 then recalculated to $6,850, but subsequently provided relief to effectively restore the original limit.
Source: IRS, Revenue Procedure 2018-30.
"The contribution limits for various tax-advantaged accounts for the following year are usually announced in October, except for HSAs, which come out in the latter part of April or early May," explained Harry Sit, CEBS, who writes The Financial Buff blog.
"While we saw an unprecedented adjustment to previously announced 2018 limits, followed by another adjustment, we have no reason to think 2019 limits will fluctuate," said Harrison Stone, general counsel at ConnectYourCare, a Baltimore-based HSA services provider. The IRS announcement "makes clear the new limits and should be reliable guidance," as the IRS "is apt to avoid additional complications, given the confusion in contributions amounts earlier in the year," he noted.
"We're increasingly seeing HSAs function as a critical resource for Americans to fund their care today, tomorrow, and in retirement," Stone added. "Annual contribution limit increases allow HSAs to maintain their value and further grow their role as a key retirement planning building block."
"Employers should consider these limits when planning for the [upcoming] benefit plan year and should review plan communications to ensure that the appropriate limits are reflected," advised Damian A. Myers, a labor and employee benefits attorney with Proskauer in Washington, D.C.
Benefit managers should be aware of some of the fine points regarding annual HSA contributions and spending, especially when answering participants' questions or communicating the new limits for the forthcoming year:
- Catch-up contributions can be made anytime during the year by HSA-eligible participants who will be age 55 or older by the end of the year. Unlike other limits, the $1,000 catch-up amount does not vary from year to year.
- An HSA is in an individual account holder's name, even when used by a spouse or dependents with family coverage to pay medical expenses. When both spouses have self-only coverage, each spouse may contribute up to the annual HSA self-only limit in their own HSA.
- While a married couple under a family HDHP share one family HSA contribution limit, they can contribute up to that shared limit in separate accounts and, if both are age 55 or older, each make a separate $1,000 catch-up contribution to an account in their own name.
- While the Affordable Care Act (ACA) allows parents to add their adult children who have not reached age 26 to their health plans, the tax laws regarding HSAs have not changed and children ages 19 until age 26 must be considered a tax dependent in order for an adult child’s medical expenses to qualify for payment from a parent’s HSA.
- Contributions for a given year may be made until the individual's federal tax return due date for that year (generally April 15), without extensions. The HSA administrator must indicate that such contributions are attributed to the prior calendar year.
- HSA holders who lose their eligibility during the year must pro-rate their annual contribution based on the number of months during which they were HSA-eligible on the first day of the month.
- Under the last-month rule, those covered by an HSA-eligible health plan on Dec. 1 are 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. 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.
- The self-only annual limit on HDHP out-of-pocket expenses applies to each covered individual, regardless of whether the individual is enrolled in self-only coverage or family coverage.
New Inflation Gauge
Annual HSA and HDHP limits reflect cost-of-living adjustments and rounding rules under Internal Revenue Code Section 223. However, the Tax Cuts and Jobs Act enacted last December applied the so-called chained consumer price index (chained CPI) to increases in HSA and several other employee benefits—such as health flexible spending accounts, commuter plans and adoption assistance benefits.
As an inflationary measure, chained CPI rises at a slower rate than the more traditionally used CPI, since the chained CPI allows for consumer substitution among the goods and services that make up the index. For this reason, despite an uptick in the inflation rate this year, the increase for self-only coverage for 2019 was the same as for 2018 (up $50), and the increase for family coverage was smaller than was set for 2018 (up $150).
ACA's Limits Differ
There are two sets of limits on out-of-pocket expenses for HDHPs determined annually by federal agencies, which can be a source of confusion for plan administrators.
The Department of Health and Human Services (HHS) establishes annual out-of-pocket or cost-sharing limits under the ACA, applied to essential health benefits covered by a plan, excluding grandfathered plans.
The HHS's annual out-of-pocket HDHP maximums have been slightly higher than those set by the IRS due to different methodologies, but to qualify as an HSA-compatible HDHP, a plan must not exceed the IRS's lower out-of-pocket maximum.
HHS published its 2019 ACA out-of-pocket limits in the Federal Register on April 17, 2018, in its Notice of Benefit and Payment Parameters for 2019 final rule.
Below is a comparison of the two sets of limits.
Out-of-pocket limits for ACA-compliant plans (set by HHS)
Out-of-pocket limits for HSA-qualified HDHPs (set by IRS)
For instance, if the plan provides coverage in the following areas before the individual or family satisfies their deductible, it is not HSA-eligible.
Besides a high deductible, an HDHP can't reimburse providers in whole or part for any health services other than preventive care before those covered by the plan meet their annual deductible.
- Prescription drugs. Plans may not cover nonpreventive prescription drugs with only a co-pay before an individual or family meets the annual deductible.
- Office visits. Excluding preventive care such as physical checkups or immunizations, plans may not cover office visits with only a co-pay, without having to meet the annual deductible first.
- Emergency. Plans may not cover emergency services with a co-pay outside the deductible.
Under an HSA-compliant HDHP, some prescription drugs are coverable as preventive care in some circumstances (Caremark's 2018 list is here), but patients typically must pay out-of-pocket to treat ongoing chronic conditions until they satisfy their deductible.
"As lawmakers seek to reduce health care costs and encourage consumerism, proposals to repeal restrictions on the use of, and limits on contributions to, HSAs are likely to receive consideration," said Chatrane Birbal, senior advisor of government relations at SHRM and co-author of the 2018 SHRM Guide to Public Policy Issues.
The recently introduced Chronic Disease Management Act, for instance, would amend the tax code so that HDHPs paired with HSAs could cover chronic disease treatment on a pre-deductible basis.
"Employers want to be able to offer the best consumer‐directed options possible, but some of the rules surrounding HSAs and high‐deductible plans should be updated to match the needs of a modern workforce," Birbal said.
HSAs and Medicare
Under current law, individuals enrolled in Medicare may not contribute to an HSA, although HSA funds contributed earlier may be used to pay for qualified medical expenses on a tax-free basis.
As the nonprofit Medicare Rights Center explains, if individuals age 65 or older are employed and covered by an employer-sponsored HDHP, whether they can continue contributing to their HSA depends on these circumstances:
- If they work for an employer with fewer than 20 employees, they may need Medicare in order to have primary insurance, even though they will lose the ability to contribute to their HSA. This is because health care coverage from employers with fewer than 20 employees pays secondary to Medicare.
- If they work for an employer with 20 or more employees, then their employer-sponsored health care coverage pays primary to Medicare, so they may choose to delay Medicare enrollment and continue contributing funds to their HSA.
Those who delayed enrolling in Medicare should stop contributing to their HSA at least six months before they plan to enroll in Medicare, the Medicare Rights Center advises. This is because those newly enrolled in Medicare Part A receive up to six months of retroactive coverage, so those who don't stop making HSA contributions at least six months before Medicare enrollment may incur a tax penalty.
A Popular Benefit
Source: SHRM's forthcoming 2018 Employee Benefits report (June 2018).
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Source: The Society For Human Resource Management (SHRM) https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2019-hsa-contribution-limits-rise-irs-says.aspx