IRS Announces Higher HSA Limits for 2023 by Christopher Taarick, JD, LLM
Posted on May 08, 2022
Individuals participating in high-deductible health plans (HDHPs) will be able to contribute more of their pre-tax earnings to health savings accounts (HSAs) in 2023 and yield related tax and savings benefits.
The IRS recently announced it will increase the annual HSA contribution limits that qualify for a full tax deduction in 2023 to $3,850 (up from $3,650 in 2022). For family plans, the annual limitation on deductions will rise to $7,750 (up from $7,300 in 2022.) HSA holders age 55 and older by the end of the year can make an additional “catch-up” contribution of $1,000 to their HSAs.
To qualify for an HSA, taxpayers must participate in “high-deductible” health plans, which, for 2023, are those with:
- a minimum annual deductible of $1,500 for self-only coverage or $3,000 for family coverage (up from $1,400 and $2,800, respectively, in 2022,) and
- a maximum out-of-pocket cost (with expenses including deductibles and co-payments and excluding plan premiums) of $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, in 2022.)
In addition to providing plan participants with reduced insurance premiums, high-deductible health plans also allow taxpayers to enjoy the triple-tax benefits of HSAs. This means that 1) contributions are made with pretax dollars that reduce one’s taxable income, 2) invested contributions, interest and earnings grow tax free, and 3) withdrawals may be taken free of tax when used to pay for qualifying medical expenses, including out-of-pocket deductible costs. Moreover, taxpayers may exclude from their gross income any HSA contributions made by their employers, and they may keep their HSAs as their own even if they change jobs or leave the workforce.
Over the past few years, the IRS has greatly expanded the range of medical and non-medical expenses that qualify for tax-free withdrawals from HSAs. Today, taxpayers can use HSA savings to pay for acupuncture, weight-loss programs for the treatment of specific, physician-diagnosed disease, psychiatric and psychologic care, durable medical equipment, and certain over-the-counter medications and personal-care items, as well as the costs for continuation of health care coverage under COBRA and premiums paid for long-term-care insurance. Using HSA funds for anything other than a qualifying medical expense will be subject to tax and a penalty.
Once taxpayers enroll in Medicare, they may no longer contribute to their HSAs, which, by that point, may have substantial balances. Withdrawals taken for qualifying medical expenses (including Medicare deductibles and copays) will continue to be free of tax. However, beginning at age 65, taxpayers may also use their HSA like they use their retirement savings and make taxable withdrawals for non-qualifying medical expenses without incurring any penalties.
About the Author: Christopher Taarick, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he helps private companies and high-net-worth families develop tax-efficient business and estate plans. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
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