Modest Boost for 2018 HSA Contribution Limits

The IRS has released updated annual contribution limits for health savings accounts for 2018. However, the proposed American Health Care Act includes provisions to increase those limits significantly, as well as provide additional benefits to HSA account holders.
2018 HSA contribution limits

American Health Care Act, if passed, would raise limits significantly

As in past years, the Internal Revenue Service (IRS) made a modest cost-of-living increase to health savings account (HSA) limits for 2018. For participants in high-deductible health plans (HDHPs), the pretax contribution limit for individual coverage rose from $3,400 this year to $3,450 in 2018; the contribution limit for family coverage went from $6,750 to $6,900.

The IRS defines an HDHP as insurance coverage with an annual deductible of at least $1,350 for an individual and $2,700 for a family. It specifies that annual total out-of-pocket expenses, including deductibles and copays (but not premiums), do not exceed $6,650 for individual coverage and $13,300 for family coverage. The chart below compares 2017 HDHP limits with 2018 limits.

High-Deductible Health Plan Contribution Limits, 2017 vs. 2018

 

Individual Coverage

Family Coverage

2017 contribution limit

$3,400

$6,750

2018 contribution limit

$3,450

$6,900

 

2017 minimum annual deductible

$1,300

$2,600

2018 minimum annual deductible

$1,350

$2,700

 

2017 max out-of-pocket

$6,550

$13,100

2018 max out-of-pocket

$6,650

$13,300

 

Proposed contribution limit under AHCA

at least $6,550

at least $13,100

 

If approved, AHCA would increase 2018 limits

The American Health Care Act (AHCA), approved May 4, 2017, by the House of Representatives to replace the Affordable Care Act (ACA), proposes new guidelines for HSA account contributions. Contribution limits would equal the maximum of the sum of the annual deductible and out-of-pocket expenses under an HDHP. This would increase the basic limits to at least $6,550 for individual coverage and $13,100 for family coverage, which nearly doubles the current IRS-stated 2018 limits.

The AHCA would also:

  • Reduce the 20 percent penalty tax on early (before age 65) nonqualified distributions to 10 percent;
  • Categorize over-the-counter medication purchases as qualified distributions;
  • Permit both spouses covered under family coverage to make catch-up contributions to the same HSA; and
  • Allow expenses incurred before the establishment of an HSA, but while an account holder was covered by an HDHP, to be paid by the HSA if within 60 days of the coverage start date.

The proposed AHCA legislation emphasizes individual responsibility for health care more than the ACA does.

Impact on businesses, employees

HSA accounts allow employees to contribute pretax money to pay for expenses incurred under an HDHP. Employers can also contribute to workers' accounts if the company offers a "cafeteria" benefit plan that provides for HSA support. Such contributions are not subject to income tax withholding or the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Act.

Because an HSA does not have a "use-it-or-lose-it" feature, contributions can accumulate over the years, and balances can be invested. Nonqualified distributions after age 65 are simply taxed as regular income. These features make HSAs attractive for supplementing retirement savings. Thus, businesses have increasingly embraced HSAs as part of their retirement benefit strategies.

The potential expansion of HSA contribution limits as well as a reduction in the restrictions on account distributions would both likely amplify the plan’s appeal for all concerned.

Jessica curtin headshot
Jessica Curtin, QKA, CPFA, TGPC, Retirement, FSA, and HSA Compliance Analyst. Jessica joined the Compliance Risk organization of Paychex in October 2016.
We can help you tackle business challenges like these Contact us today

Recommended for you

About Paychex

Paychex was founded over four decades ago to relieve the complexity of running a business and make our clients' lives easier, so they can focus on what matters most.

We provide: