Inflation Adjustments Enhance Health Savings Accounts for 2025

The IRS has recently released the inflation-adjusted limits for Health Savings Accounts (HSAs) for the year 2025. These adjustments are announced earlier than other inflation-adjusted amounts, allowing business owners to prepare adequately for the upcoming year.

Fundamentals of HSAs

A Health Savings Account (HSA) is a trust established exclusively for covering qualified medical expenses for its beneficiary. HSAs can only be set up for individuals who are covered under a high-deductible health plan (HDHP) and who are not enrolled in Medicare or other non-exempt health coverage (with exemptions including dental, vision, long-term care, accident, and specific disease insurance).

Contributions to an HSA within specified limits qualify for an above-the-line tax deduction, with annual contribution limits and the deductible and out-of-pocket expenses adjusted for inflation each year.

2025 Inflation Adjustments

According to Revenue Procedure 2024-25, the 2025 inflation-adjusted limits for HSA contributions are as follows:

- Annual Contribution Limits:  For individuals with self-only HDHP coverage, the limit will be $4,300. For those with family coverage, the limit increases to $8,550, up from $4,150 and $8,300 respectively in 2024. Additionally, those aged 55 or older by the end of the tax year can make an additional catch-up contribution of $1,000, which remains unchanged for both 2024 and 2025.

- HDHP Limits: For 2025, an HDHP must have an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage, up from $1,600 and $3,200 in 2024. The annual out-of-pocket expenses (excluding premiums) must not exceed $8,300 for self-only coverage or $16,600 for family coverage, up from $8,050 and $16,100 respectively in 2024.

Health Reimbursement Arrangements (HRAs)

The IRS has also announced the inflation-adjusted limit for Health Reimbursement Arrangements (HRAs) for 2025. HRAs, which must be funded by eligible individuals rather than employers, offer tax-free reimbursements for eligible medical expenses. For 2025, the maximum allowable amount for an excepted benefit HRA will be $2,150, an increase from $2,100 in 2024.

Leveraging HSAs

HSAs offer significant benefits to both employers and employees. Contributions are made on a pre-tax basis, allowing the funds to grow tax-free and be withdrawn tax-free for qualified medical expenses such as doctor visits, prescriptions, chiropractic care, and long-term care insurance premiums. Moreover, HSAs are portable, meaning they remain with the account holder regardless of changes in employment status. Many employers find HSAs to be a valuable fringe benefit for attracting and retaining talent.

For further inquiries or assistance with HSAs in your business, please contact us.