Does my employer contribution count towards my hsa limit

Health savings accounts (HSAs) are tax-advantaged investment accounts for individuals with qualifying high-deductible health plans (HDHP). If your health insurance plan meets the requirements to be considered an HDHP, you can make tax-deductible contributions to an HSA, allow your money to grow, and take tax-free withdrawals to cover HSA eligible expenses.

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Because an HSA provides tax savings both when making contributions and when making withdrawals, it is a valuable account to help save for medical care or for retirement. However, there are rules for how much you can save in your HSA each year.

Here are the HSA contribution limits for 2021 and for 2022. 

Maximum HSA contribution limit in 2021 and 2022

The maximum HSA contribution limit can change from year to year and varies depending on whether you have self-only (individual) coverage or a family insurance plan. The table below shows contribution limits for both 2021 and 2022. 

Table source: Internal Revenue Service (IRS).

The IRS announces the HSA contribution limit that applies annually. You can review IRS Publication 969 each year to determine the current limit. 

It's also important to note that this is an aggregate limit that applies to both your own contributions as well as any money your employer puts into your account. This is different from 401(k) rules, where employer matching funds do not affect your ability to contribute to your account. If your employer puts $2,000 into your HSA and you have self-only coverage, you would be allowed to contribute only $1,600 before hitting the 2021 contribution limit. 

HSA catch-up contributions

HSA account holders who are 55 and older are entitled to make an additional catch-up contribution valued at $1,000 on top of the above contribution caps. Because of the HSA catch-up contribution rules, the table below shows the maximum contributions that can be made if you are 55 or over. 

Table source: IRS

Catch-up contributions are intended to help older Americans who may incur outsized medical expenses, or who may not have saved enough for a secure retirement and want to boost their contributions to tax-advantaged accounts as they near the end of their careers. 

Older Americans may want to make catch-up contributions because healthcare costs tend to rise with age and because an HSA can be a valuable type of retirement savings account. HSAs work as a retirement savings plan because money can be withdrawn penalty-free for any purpose, not just medical expenses, after age 65. Once an HSA account holder turns 65, distributions not used for medical costs are taxed at their ordinary income tax rate, the same as distributions from a 401(k) or traditional IRA. 

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How does a health savings account affect taxes when I contribute?

Because HSA contributions can be made with pre-tax funds, you can deduct the amount you've contributed from your taxable income in the year you make the contribution.

The fact that HSA contributions are tax deductible means any money you contribute reduces the income you're taxed on, which saves you money on your IRS bill. It also means your take-home pay declines by a smaller amount than what you actually contributed. 

For example, if you have $50,000 in taxable income and make a $3,600 deductible contribution to an HSA, you will be taxed on only $46,400 in income due to your contribution.

The specific amount you save due to your HSA contribution will depend both on how large your contribution is and on your tax rate. Those who are taxed at a higher rate and those who make larger contributions will realize more savings. 

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A lot of people are wondering about HSA contribution limits these days. Millions of workers are being asked to pick their health benefit options for 2023 during an open enrollment period. Other HSA owners are wondering if they can contribute more to their account for 2022 without going over the line. Either way, knowing the maximum HSA contribution limits for the year in question is a must.

If your employer offers a health savings account option as part of its benefits package, don't dismiss it out of hand just because you're not familiar with how they work. After doing a little research, you might discover that an HSA is the way to go. For many people, HSAs offer a tax-friendly way to pay medical bills. There's an "above-the-line" deduction available for contributions to an HSA, money put in an HSA by your employer is excluded from gross income, earnings are tax free, and there's no tax on distributions if you use the funds to pay qualified medical expenses. You can also hold on to the account when you're no longer working for your current employer and use it tax-free for medical expenses at a different job or even during retirement. All-in-all, HSAs can be a great tool for covering your health care costs.

But there are a handful of limitations and requirements that you need to know about, and they're adjusted annually for inflation. They apply to the amount you can contribute to an HSA for the year, the minimum deductible for your health insurance plan, and your annual out-of-pocket expenses. If you or your health plan are not in compliance with the restrictions in place for any particular year, then you can say goodbye to the HSA tax savings for that year.

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Your contributions to an HSA are limited each year. For 2023, you can contribute up to $3,850 if you have self-only coverage or up to $7,750 for family coverage. For 2022, the limits are $3,650 and $7,750, respectively. Since the inflation rate has been climbing lately, the annual adjustment of these limits pushed them significantly higher from 2022 to 2023 than what we've seen in recent years.

If you're 55 or older at the end of the year, you can put in an extra $1,000 in "catch up" contributions for both 2022 and 2023. However, your contribution limit is reduced by the amount of any contributions made by your employer that are excludable from your income, including amounts contributed to your HSA account through a cafeteria plan. If you're looking to put more money in an HSA for 2022, you have until the due date for 2022 federal income tax returns, which is April 18, 2023.

The table below shows how the contribution limits have increased over the past few years. You can see how much more the maximums jumped for 2023 when compared to the increases for other years.

If you contribute too much to an HSA (including any contributions from your employer), not only will you lose the tax benefits for the excess amount, but you might also have to pay a 6% excise tax on the overage each year the excess contribution remains in your account.

Fortunately, there's a way around the 6% penalty if you go over the applicable contribution limit. You can avoid the additional tax if you withdraw (1) the excess contributions from your HSA by the due date (including extensions) of your federal income tax return for the year the contributions were made, and (2) any income earned on the withdrawn contributions and include it as income on your tax return for the year you withdraw the contributions and earnings.

Health Plan Minimum Deductibles

To contribute to an HSA, you must be covered under a high deductible health plan. For 2023, the health plan must have a deductible of at least $1,500 for self-only coverage or $3,000 for family coverage. Again, thanks to higher inflation, these amounts are quite a bit higher than the 2022 figures – $1,400 for self-only coverage and $2,800 for family coverage.

The following table shows the minimum deductible amounts for 2019 to 2023.

Limits on Out-of-Pocket Expenses

The health plan must also have a limit on out-of-pocket medical expenses that you're required to pay. Out-of-pocket expenses include deductibles, copayments and other amounts, but don't include premiums. For 2023, the out-of-pocket limit for self-only coverage is $7,500 or $15,000 for family coverage. According to the IRS, only deductibles and expenses for services within the health plan's network should be used to determine if the limit applies.

As the table below indicates, the health plan out-of-pocket expense limits for HSAs have increased each year from 2019 to 2023 to account for inflation. That includes a whopping $450 jump for self-only coverage and a $900 increase for family coverage from 2022 to 2023. Those increases are significantly higher than what we've seen in recent years.

Rocky is a Senior Tax Editor for Kiplinger with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, he worked for Wolters Kluwer Tax & Accounting and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky has a law degree from the University of Connecticut and a B.A. in History from Salisbury University.

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