Don't Mess With Taxes

Health insurance policies with lower premiums are always popular, whether the medical coverage is offered via a workplace plan or bought separately by individuals.

Those who opt for such coverage are willing to take smaller out of pocket premiums each month in exchange for larger deductibles for their overall coverage. Part of that choice is based on the opportunity to set up a companion savings account to cover those higher deductibles.

These aptly and obviously named high deductible health plans, or HDHPs, work well for folks who don't have chronic medical issues, but want to make sure they have coverage in case of an unexpected health emergency.

In the meantime, the HDHP-associated health savings account, or HSA, offers a tax-favored way to save for most of the out-of-pocket costs you have to meet under the high deductible.

The deductible amount that qualifies for HDHP treatment, as well as how much you can put into an HSA, is adjusted annually for inflation. The Internal Revenue Service has announced in Revenue Procedure 21-25 those amounts for the 2022 tax year. Here are the upcoming inflation specifics.

2022 high deductible limits: For 2022, a medical insurance policy qualifies as a high-deductible plan if it has a minimum annual deductible of $1,400 for individual coverage or $2,800 for family coverage. Those deductibles are, because of low inflation, the same as the 2021 amounts.

Below are the two tax year's figures, including the maximum out-of-pocket expenditures policy holders could face in 2021 and 2022.

Essentially, a plan's deductible amount must be at least the amounts shown in the table. As for out-of-pocket expenses, the amounts include deductibles, co-payments and other amounts, but not the premiums you pay for the plan itself.

Similar HSA adjustments: Slight inflation changes also are ahead for your HSA that helps you meet your policy's high deductible.

For 2022, you can contribute up to $3,650 to your HSA if you have individual HDHP coverage. That's a $50 bump from the 2021's $3,600 HSA maximum.

Family HDHP coverage will let you put up to $7,300 in your HSA. That's $100 more than the $7,200 allowed for these family plan HSAs this year.

Policy holders who are 55 or older by Dec. 31 can sock away an additional $1,000 for the tax year. Note that like other tax code catch-up provisions, the HSA additional contribution for older account owners is a flat one grand. It is not adjusted annually for inflation.

But if you're married, have family HDHP coverage and your spouse also will be 55 by the end of the year, he or she can also take advantage of the added $1,000 catch-up amount for his or her own separate HSA.

One more medical acronym and amount: The IRS announcement also notes an increase in 2022 for an excepted benefit HRA, the acronym for a health reimbursement arrangement.

This is a medical plan that first appeared in January 2020 and which lets employees use pre-tax dollars for vision, dental, prescription and other types of benefits separate from their main health insurance plan.

The maximum excepted-benefit HRA amount for 2022 is $1,800. The revenue procedure is effective for HRAs for 2022 and for excepted-benefits HRAs for plan years starting in 2022. That's the same as the 2021 HRAs.

Triple tax benefits for an HSA: When finances are tight, like they are now especially with so many out of jobs or facing reduced income due to the COVID-19 pandemic, the appeal of a HDHP's lower premiums is an obvious medical choice.

With all that extra money on hand that you don't have to pay for health care premiums, you might be tempted to hang onto it instead of putting some of it into an HSA. Give that another think.

Yes, it means you'll have to come up with some more money. But you'll find that designated medical cash stash is a handy way to pay out-of-pocket medical costs. Plus, an HSA has, as mentioned earlier in this post, tax advantages that could make the account a worthwhile expenditure.

In fact, an HSA offers triple tax breaks.

First, the money you put into the medical account is tax free. This is usually accounted for through salary deferral at your workplace. The amount is taken out of your paycheck before taxes are calculated. If you make HSA contributions directly, you deduct the amount you contribute when you file your taxes.

Second, the earnings on the money you contribute to your HSA grows tax-free.

Third, when you use the HSA money to pay allowable out-of-pocket medical expenses, those withdrawals also are tax-free. This includes using HSA money for not just the usual, and many, IRS-approved medical costs we all tend to run up each year, but also to pay for treatments of chronic medical conditions.

More HSA advantages: There also are a few more things that make an HSA appealing.

Its balance can be carried over from year to year. There's no use it or lose it threat as with a workplace flexible spending account, or FSA.

Your HSA is portable. It's not tied to your job, so if you change employers, you take your HSA with you when you got to your new workplace.

Finally, if you have money in your HSA after you turn 65, you can use the funds without tax penalty for any reason. If you use HSA money before this age for non-medical reasons, you'll owe a 20 percent penalty on that withdrawal.

The 65+ withdrawal option means many folks essentially treat a well-funded HSA as another, de facto retirement account. And one without any government required minimum distributions (RMDs) to worry about when you celebrate your 72nd birthday.

Of course, any medical coverage decision is based on many things, not just the tax implications.

But if tax savings are a component, do take them into account, along with all the health care and financial factors so that you can find a policy that fits both your medical and fiscal needs. You might find an HDHP and HSA is the right coverage Rx for you and your family.

You also might find these items of interest:

• Contributing to an HSA is 1 of 5 tax tasks to take care of by May 17
• Do you have more time to use FSA money? Here are 6 spending suggestions
• 10 overlooked medical expenses that could make it worth itemizing tax deductions

UPDATE, Nov. 10, 2021: Although this post was published on May 11, 2021, it is part of the ol' blog's annual 10-part tax inflation series, which started today. This post will be included in Part 5's look at medical-related tax provisions. The box below has more information on the 2022 tax inflation adjustments series.

Thanks for reading about 2022's HDHP and HSA inflation adjustments.
This post is part of the ol' blog's overall series
on inflation changes for the coming year.
The 10-part series started with a look at 2022's income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of next year's tax-related inflation updates.
If, after perusing this HDHP/HSA post, you want
to check out other inflation adjustments for 2022,
you'll find the links, when posted, at that first post's directory.
Note: The 2022 figures in this post apply to that tax year's returns to be filed in 2023.
For comparison purposes, you'll also find 2021 amounts that apply to this year's taxes that,
pending any COVID-19 delays like we've faced the last couple of years, will be due April 15, 2022.

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