By Sarah Brenner, JD
The IRS has announced the 2020 inflation-adjusted limits for Health Savings Accounts (HSAs).
How an HSA Works
An HSA is a tax-free account that is used to pay for qualified medical expenses that aren’t covered by insurance. It is similar to an IRA in that it’s a custodial or trust account set up with a financial institution owned and controlled by the individual, not the employer.
An HSA is designed to be used in conjunction with a high deductible health plan (HDHP). The HSA can be used to pay for health expenses until the plan deductible is met. The HDHP would then cover the high-cost medical expenses.
An HSA can offer the best of both worlds. Contributions are tax deductible and distributions taken to pay for qualified medical expenses are tax-free. There are no income limits for contributions and there is no requirement that an individual have earned income.
New 2020 Limits
For 2020, the annual HSA contribution limit for an individual with self-only coverage under a HDHP will be $3,550 (up from $3,500 for 2019). For those with family coverage, the contribution limit will be $7,100 (up from $7,000 for 2019).
For 2020, to be considered an HDHP for HSA purposes, a plan must have an annual deductible that is not less than $1,400 (up from $1,350 for 2019) for self-only coverage or $2,800 (up from $2,700 for 2019) for family coverage. Annual out-of-pocket expenses cannot exceed $6,900 (up from $6,750 for 2019) for self-only coverage or $13,800 (up from $13,500 for 2019) for family coverage.