Part of the IRS building (Photo: Allison Bell/ALM)

The Internal Revenue Service (IRS) is making the health savings account (HSA) deductible range a little more generous for 2021.

The minimum deductible levels are staying the same, but maximums are rising a bit.

The IRS has published the new program limits in IRS Revenue Procedure 2020-32.

Resources

Federal law requires HSA owners to combine the accounts with health insurance with substantial minimum deductibles and moderately high limits for spending on out-of-pocket (OOP) medical expenses.

Here’s a table showing that the minimum deductibles will stay the same in 2021, but the maximum contribution deduction levels and maximum OOP limits will increase 1.4%.

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2020 2021 Change
Individual  
Contribution limit             $3,550             $3,600 1.4%
Minimum deductible            $1,400             $1,400 0.0%
Annual OOP maximum             $6,900             $7,000 1.4%
Family
Contribution limit             $7,100             $7,200 1.4%
Minimum deductible             $2,800             $2,800 0.0%
Annual OOP maximum           $13,800           $14,000 1.4%

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The Backround

Congress created the HSA program when it passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

The program provides a mechanism taxpayers can use to keep health account contributions out of taxable income and to use the account cash to pay for qualified health care expenses.

People can also use health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs) to keep health care money out of taxable income. For individuals, one of the appeals of using an HSA is that the individual with the account, not an employer plan sponsor, owns the HSA. Even workers in employer-sponsored HSA programs can take the HSAs with them when they leave the employer.

HSA owners who have no need to spend the HSA assets on medical bills during their working years can use the accounts to pay for post-retirement health care, or post-retirement long-term care.

One HSA program architects’ goal was to help people pay routine health care bills out of their own resources, without having to file insurance claims and put up with health plan utilization management programs for relatively small items.

Another goal was to give patients more “skin in the game,” to make patients more conscious of what health care costs and to encourage patients to think about the cost of care as well as the quality.

About 26 million people now have $66 billion in assets in 28 million HSAs, according to Devenir.

Taxpayers with HSAs may not actually take an HSA deduction every year.

U.S. taxpayers reported $5.3 billion in HSA deductions for 2017 on just 1.8 million returns, up from $4.9 billion in deductions on 1.7 million returns for 2016, according to the latest data available from the IRS.

The Budget Problem

From the perspective of federal budget analysts, the permanent nature of the HSA program makes it a fairly big “tax expenditure,” or voluntary move to give up collecting what could be federal tax revenue.

The federal Office of Management Budget shows in its latest Analytical Perspectives report that the HSA program and an older, related program, the medical savings account program, will cost the federal government about $117 billion in tax revenue over the period from 2020 through 20209.

Congress set the minimum deductible requirement for HSAs partly to discourage unnecessary use of care, but partly to minimize the effects of the program on the federal budget deficit. The impact on the budget deficit shapes many of the battles in Washington over what the HSA minimum deductible should be and what services HSA-compatible health plans should be able to cover before the deductible kicks in.

 

— Read What Passage of the CARES Act Means for FSA and HSA Clientson ThinkAdvisor.

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