Inflation has increased the cost of everything, including health care. That's why many people, even before the recent jump in the cost of living, have chosen a high deductible health plan, or HDHP.
As the name indicates, HDHPs require enrollees to pay more out-of-pocket costs, aka the high deductible amount, before policy coverage kicks in. However, HDHPs typically have lower monthly premiums than the traditional type of medical insurance.
Many individuals, especially those in generally good health, accept the risk of a higher deductible in exchange for the immediate cash-flow benefit of lower premiums.
Another part of the HDHP trade-off is the opportunity to set up a companion health savings account, or HSA. Money in this tax-favored account is used to pay higher deductible costs.
The deductible amount that qualifies for HDHP treatment, as well as how much you can put into an HSA, are adjusted annually for inflation. The Internal Revenue Service today issued Revenue Procedure 23-23 with those amounts for the 2024 tax year.
2024 high deductible limits: When you search for a HDHP, you want to make sure it meets the IRS guidelines.
In 2024, a medical insurance policy qualifies as a high-deductible plan if it has a minimum annual deductible of $1,600 for individual coverage. That's up from $1,500 for 2023.
For family coverage, an HDHP has a deductible of $3,200 for family coverage (up from this year's $3,000 deductible.
There also are annual inflation-adjusted limits on the maximum amount of out-of-pocket expenses associated with an HDHP. This includes deductibles, co-payments, and other amounts, but not the premiums you pay for the plan itself.
For 2024, these expenses cannot exceed $8,050 or self-only coverage, an increase from 2023's $7,500 limit. For family plans, the limit is $16,100. That's a bump from the 2023 limit of $15,000 for family coverage.
The following table shows the HDHP amounts for 2023 and 2024 tax years.
High Deductible Health Plan types
Maximum health plan deductible,
Maximum health plan deductible,
Maximum out-of-pocket expenditures,
Maximum out-of-pocket expenditures,
Essentially, a plan's deductible amount must be at least the amounts shown in the table.
HSA adjustments, too: Similar inflation changes are also ahead for the HSA that helps cover expenses that fall into the associated policy's high deductible.
For 2024, you can contribute up to $4,150 to an HSA if you have individual HDHP coverage. That's up from this year's $3,850 maximum HSA contribution.
Family HDHP coverage in 2024 will let you put up to $8,300 into the associated HSA. That is an increase from the current $7,750 family coverage HSA maximum.
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 2024 for an excepted benefit HRA, the acronym for a health reimbursement arrangement.
HRAs are employer-funded medical plans whose funds are used to pay back, or reimburse, employees for qualified medical expenses. This includes vision, dental, prescription, and other types of benefits separate from their main company-provided health insurance plan.
The money that goes into an HRA is pre-tax, meaning the workers don't face any tax consequences on approved reimbursements. The business also is allowed to claim a tax deduction for these reimbursements.
However, unlike an HSA, an HRA is not portable. Workers can't take HRA funds with them when they leave their jobs.
The maximum HRA amount for 2024 is $2,100. The 2023 HRA amount is $1,950.
Triple tax benefits for an HSA: Most of us tend to think short term when it comes to financial decisions. That's understandable, especially at times like these where money is tight.
That's why some HDHP enrollees ignore the benefit of opening an HSA.
Sure, that will give you more immediately available cash. But if you have a high deductible and a medical emergency pops up, which, let be honest, seems to also happen at the worst possible time, you'll be stuck covering all the deductible costs.
But if you have an HSA, not only will it help pay your medical expenses, the account also has three nice tax advantages.
First, the money you put into the medical account is tax free. Your contributions usually are accounted for through salary deferral at your workplace, meaning the HSA amount is taken out of your paycheck before taxes are calculated. Plus, any employer contributions aren't included in your taxable income.
If you make HSA contributions directly, you deduct the amount you contribute when you file your taxes. This is what's known as an above-the-line deduction, meaning you don't have to itemize to make the medical claim.
Second, the earnings on the money you contribute to your HSA grows tax-free. That's tax-free, not tax-deferred. No tax due on it ever.
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.
OK, we're talking taxes, so there's a caveat.
Be careful when taking HSA distributions. Make sure to use the funds for allowable medical costs. If you're younger than 65 and spend HSA money on something that's not IRS approved, you'll owe a 20 percent penalty on that withdrawal.
Added HSA advantages: OK, those are the big three immediate tax savings from an HSA, but wait, there's more.
An HSA's year-end 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, as mentioned in the non-portable HRA discussion earlier. It's not tied to your job, so if you change employers, you take your HSA with you when you go 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. This 65+ withdrawal option means many folks essentially treat a well-funded HSA as another, de facto retirement account. And it's a nest egg without any government required minimum distributions (RMDs) to worry about when you celebrate your 73rd 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 your (and covered family) health care and financial factors, so that you can find a policy that fits both your medical and fiscal needs.
In doing so, you might find an HDHP and HSA is the best health care coverage Rx.
You also might find these items of interest:
- Rolling IRA funds into an HSA is possible, but not simple
- HSAs, the champion when it comes to tax break multitasking
- 2023 tax year inflation adjustments to medical tax provisions