For 2016, the Internal Revenue Service (IRS) made some minor adjustments to health savings account (HSA) contribution limits. Generally, HSA contribution increases are linked to inflation. With inflation barely registering in 2015, the increases for 2016 are minimal. The HSA contribution limit for individuals remains unchanged, but it increases by $100 for families. The minimum deductible for high-deductible health plans (HDHPs) stays the same, but the out-of-pocket limits increased by $100 for individuals and $200 for families.
How HSAs Work
An HSA is a popular health insurance plan alternative that is considered to be more consumer-focused in how it covers medical costs. Because it shifts the responsibility for choosing health care providers and services to the plan holder, it has the potential to lower the overall cost of health care for the individual. Since plan holders are paying cash, they are better positioned to negotiate more favorable prices for medical services. Many medical providers are happy to charge lower prices for cash payments.
An HSA is an individual account, similar to a traditional individual retirement account (IRA), which offers special tax incentives for setting money aside. Account holders are allowed to make before-tax contributions, and the earnings in the account accumulate tax-free. Employers can also contribute on behalf of employees up to the contribution limit. As long as account holders use HSA funds to pay for eligible medical expenses, the funds can be withdrawn tax-free. In addition, any unused HSA funds can be rolled over from year to year.
The total HSA contribution limit for both employers and employees is $3,350 for individuals and $6,750 for families. The catch-up contribution for individuals age 55 and over remains the same at $1,000, which can be added to the maximum individual contribution.
How HDHPs Work
For the plan to work, an HSA must be paired with an HDHP, which carries a high deductible that must be paid before insurance coverage kicks in. Generally, HDHPs are lower-cost health insurance plans because of the high deductible. The account holders use the savings accumulated in the HSA to cover regular medical care, such as doctor visits and preventative care. The HDHP covers major medical expenses. HSA funds can also be applied to HDHP premiums and the deductible.
The minimum deductible is $1,300 for individual HDHP plans and $2,600 for family plans. The maximum amount of expenses to be paid out of pocket for the year is $6,550 per individual and $13,100 per family. Out-of-pocket expenses include deductible payments, co-payments and other amounts, not including premiums.
Additional HSA Benefits
HSAs are portable plans that go with an individual when he changes employers. Between jobs, HSA funds can be used to pay for premiums. After age 65, the account holder can use HSA funds to pay for Medicare premiums and any eligible out-of-pocket expenses.
As with qualified retirement plans, the HSA includes a catch-up contribution provision for account holders age 55 and older. The catch-up amount for 2016 is $1,000, which means an individual can contribute a total of $4,350 and $7,750 for a family contribution.
IRS Penalties May Apply
As a tax-qualified account, an HSA is subject to the same type of consequences as an IRA if the funds are misused, except the penalty is a little steeper. Withdrawals made to pay for ineligible expenses are penalized 20% on top of ordinary taxes. Account holders 65 and over are not penalized for using the funds on ineligible expenses, but they pay ordinary income taxes on the amount that they withdraw.
The Bottom Line
Due to low inflation in 2015, there were only minor adjustments made to the 2016 HSA contribution and out-of-pocket limits. With the uncertainty surrounding traditional health insurance plans, the HSA/HDHP plan remains an attractive alternative for people who want more control over their health care expenditures.