IRS announces cost of living adjustments for HSA, HDHP and HRA

The IRS has announced additional cost-of-living adjustments, these focus on changes affecting Health Savings Accounts (HSA), High-Deductible Health Plans (HDHP), and Health Reimbursement Arrangements (HRA)

Details can be found in the 2023-23 revenue procedure. Here is a summary.

HSA extension

For calendar year 2024, the annual HSA contribution limit for own-account-only covered payers under a high-deductible health plan is $4,150 (up from $3,850 in 2023). The annual HSA contribution cap for taxpayers with family coverage under a high-deductible health plan is $8,300 (up from $7,750 in 2023).

The HSA recovery contribution (for those taxpayers aged 55 and over) has not changed as it is not subject to cost of living adjustments. $1,000 remains.

HDHP extension

A high-deductible health plan is a health plan with an annual deductible of at least $1,600 for self-only coverage or $3,200 for family coverage. Deductibles for annual out-of-pocket expenses, upfront payments, and other amounts for such plans cannot exceed $8,050 for self-only coverage or $16,100 for family coverage.

HR extension

The annual contribution limit for an HRA exempt benefit is $2,100 (up from $1,950 in 2023).

Effective date

These new limits are in effect for the 2024 calendar year.

Definitions

What does all this alphabet soup mean? Here’s a quick rundown.

Under Section 223 of the Tax Code, eligible individuals are eligible to contribute to an HSA. You must be covered by an HDHP and have no disqualifying health coverage to qualify. And HDHP must meet annual caps — that’s what the IRS updates each year, and what you’ll find in Rev. Proc. 2023-23.

You can make pre-tax contributions to your HSA independently, and your employer can choose to give funds. Employer contributions are not considered income for tax purposes. Regardless of who contributes, the funds in an HSA will increase your federal tax-free income.

And when do you take them off? Distributions for qualified medical expenses, including dental and vision expenses, are not taxable for federal income tax purposes. Eligible medical expenses include treatment for a diagnosed disease or condition and must be ordered by your doctor. Medical expenses include routine medical, dental and vision visits, specialist care and treatments, including medications and follow-up visits. Medical expenses may also include associated out-of-pocket expenses, such as mileage. Medical expenses that qualify for the medical and dental expense deduction are typically the same as those that are eligible for HSA purposes.

There are restrictions. An HDHP can only provide benefits once the minimum deductible is met. In other words, you must meet your deductible (out-of-pocket expenses) before your HDHP benefits take effect. However, if you combine your HDHP with an HSA, you can pay those qualifying medical bills using the funds in your HSA.

An HRA benefit with exception is offered with a traditional group health plan and allows employers to assist with costs for additional medical care, such as vision or dental coverage, coinsurance and copayments, and other costs not covered by insurance. And like other HRA plans, there’s no “use it or lose it,” unused amounts roll over from year to year. These limits are adjusted each year based on inflation, as noted above.

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