2019 HSA Changes: Make the Most of Health Savings Accounts

Health savings accounts offer taxpayers one of the most favorable ways to save money. With contributions that are tax-deductible and distributions that are tax-free as long as they're used for qualifying medical expenses, HSAs offer a double benefit that you won't find with IRAs, 401(k)s, or most other types of tax-favored accounts.

HSAs are designed to help people save for healthcare expenses by using high-deductible health insurance policies. These policies, known as HDHPs for short, typically feature extremely low monthly premiums in exchange for coverage that only kicks in after you pay a sizable amount toward your own healthcare costs. Every year, the guidelines for HSAs change modestly, and those who want to take full advantage of the accounts need to update their plans accordingly.

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The latest changes to HSAs for 2019

The various limits that apply to HSAs are tied to inflation, and as we've seen in past years, rising cost levels throughout the economy will push many of those limits higher. Two sets of numbers will see changes as a result, while one set will remain unchanged:

• Maximum contribution levels will go up, letting savers put more money aside in HSAs.
• Minimum annual deductible levels will stay at their 2018 levels, allowing HSA participants to avoid having to cover any more of their own primary healthcare costs before insurance coverage kicks in.
• Maximum out-of-pocket thresholds will also rise, potentially boosting the amount of financial responsibility for those who have high levels of healthcare spending.

You can see the new numbers and the changes from last year's figures in the table below.

 Table by author. Data source: IRS.

Catch-up contributions are also allowed for those who are 55 or older. If you qualify, you can add $1,000 to the applicable contribution limit above. For example, those who will be 55 by the end of 2019 and have self-only coverage will be able to contribute and deduct up to $4,500 with an HSA.

Why HSAs are a great deal

Most taxpayers concentrate the most on up-front deductions, and that's one area in which HSAs are quite helpful. Being able to deduct HSA contributions gives taxpayers a big advantage over having to pay medical expenses from regular savings, because most healthcare expenses are deductible only if you itemize and only to the extent that they're greater than 7.5% of your adjusted gross income. That leaves out the bulk of Americans, and even those who qualify often see a substantial haircut on what they can deduct compared to what they spend.

Yet the hidden benefit to HSAs comes from the tax-free growth that they offer. As long as you use money on qualifying medical expenses, then all the income and gains that your HSA investments produce is free of federal income tax. Only if you take money out for something other than qualified expenses will you face tax and penalties.

Moreover, HSAs have a lot more flexibility than some other vehicles for healthcare savings. For instance, flexible spending accounts are frequent offerings from employers, letting you set aside pre-tax money toward annual healthcare expenses. However, FSAs generally require you to use all the money you set aside during the calendar year or shortly thereafter, with any unused money getting forfeited. By contrast, HSAs are allowed to hold money for years into the future, and that opens the door to using HSAs as long-term investment vehicles with the intent of using the money to cover inevitable healthcare expenses in retirement.

More changes to come?

HSAs have also attracted the attention of lawmakers who want to expand their use. Legislation that passed the House earlier this year would potentially let savers set aside an additional $3,250 for self-only coverage or $6,500 for family coverage. By matching the contribution limits to the out-of-pocket maximums, the bill would let those with the means to save more handle all of their healthcare expenses through an HSA. However, the Senate has yet to take up the legislation, and many fear that the bill will eventually die.

Even without expansion, health savings accounts are extremely useful, and 2019 changes will make them incrementally better for taxpayers. HSAs are worth a closer look, especially if you have health insurance options that would let you qualify to use them without major effort.