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HDHP Minimum Deductible and Out of Pocket Max – Defined

Overview

As with many things HSA related, the HDHP (High Deductible Health Plan) definitions are more complicated than they need to be. Each year, the IRS defines what plans are “HSA eligible” meaning those plans allow you to open and contribute to a Health Savings Account. The definition consists of two attributes – Minimum Deductible and Out of Pocket Max. Moreover, these two attributes vary based on the type of coverage you have, which is either self-only or family. Note that even if you get those right and your plan is an HDHP (and by definition, HSA eligible), there are still other requirements that determine your HSA eligibility – this is just the first of 4.

The goal of this article is to explain the HSA Minimum Deductible and the Out of Pocket Max, what they are, their amounts for a given tax year, and go through some examples of how they work and what plans qualify.

Minimum Deductible

All insurance plans have a deductible, or the amount you must pay before insurance kicks in and begins covering expenses for the year. This amount can vary between $0 and many thousands of dollars. To be HSA eligible, a plan must have a deductible greater than or equal to that year’s Minimum Deductible. In essence, it defines the “High” part of High Deductible Health Plan. It says, “if you want to contribute to an HSA, your insurance deductible must be at least this amount”.

The inverse is also true: insurance plans with a deductible less than or equal to the Minimum Deductible are not HSA eligible. If your insurance has an deductible less than the HSA Minimum Deductible, you cannot contribute to an HSA.

HSA eligible plans must have a deductible higher than the minimum deductible

Note that your deductible generally resets at year end. You can use this to your advantage by “taking a bath” in years where you have a lot of medical coverage. If you hit your deductible in a given year, you might as well schedule additional care for that year as insurance has “kicked in” and is paying for your services. If you are close to hitting your deductible, you may want to pull forward expenses from the subsequent year to hit your deductible in the current year. Once the deductible is met, your only financial liability for insurance is 1) premiums and 2) the out of pocket max (discussed next), often driven by “coinsurance”.

Out of Pocket Maximum

All insurance plans have an out of pocket maximum, or the maximum amount that you can spend on medical care in a year. Note that insurance premiums are NOT included in the out of pocket maximum. Instead, it consists of amounts you pay for 1) deductible and 2) coinsurance.

HSA eligible plans must have an out of pocket maximum less than the HDHP definition

To be HSA eligible, your plan cannot exceed the HDHP definition of Out of Pocket maximum. For some reason, the IRS decided that there needed to be an upper bound on OOP max for plans to be HSA eligible. This is counter intuitive, at least to me, as a high out of pocket max is punitive to the holder and costs them more money. It is exactly those people who need the reduced savings HSA provides.

Add it to the list of things to fix : )

If your insurance plan has an out of pocket maximum that exceeds the HDHP definition for a given year, you cannot contribute to an HSA. Also note the risk of coinsurance. Coinsurance is an amount you owe above the deductible. Often times it is stated as a percentage followed by the out of pocket max, for example, 20% up to $10,000. Assuming you have a deductible of $6,000, your plan looks like this:

  • Deductible, $6000 – amount you pay before insurance pays anything
  • Coinsurance, 20% – after your deductible, percentage of expenses you pay up to your out of pocket max. (For kicks: in this example @ 20% you would require an additional $20k of medical bills, of which you pay $4k in coinsurance, before you reach out of pocket max)/li>
  • Out of Pocket Max, $10000 – maximum amount of deductible and coinsurance you can pay in a year.

HDHP Definitions by Year

Below are HDHP definitions by year for your reference:

2016 2017 2018 2019 2020
Self-Only Min Deductible $1,300 $1,300 $1,350 $1,350 $1,400
Self-Only OOP Max $6,550 $6,550 $6,650 $6,750 $6,900
Family Min Deductible $2,600 $2,600 $2,700 $2,700 $2,800
Family OOP max $13,100 $13,100 $13,300 $13,500 $13,800

Examples for plans that qualify as HDHP

Here are some examples of 2020 insurance plans that qualify as an HDHP and allow you to contribute to an HSA:

  • Self Only: Deductible = $1,400, Coinsurance = 40%, OOP Max = $6,900
  • Meets minimum deductible; does not exceed out of pocket max.
  • Self Only: Deductible = $3,000, Coinsurance = 10%, OOP Max = $4,000
  • Exceeds minimum deductible, does not exceed out of pocket max.
  • Self Only: Deductible = $6,700, Coinsurance = 0%, OOP Max = $6,700
  • Exceeds minimum deductible; does not exceed out of pocket max.
  • Family: Deductible = $2,800, Coinsurance = 25%, OOP Max = $13,800
  • Meets minimum deductible; does not exceed out of pocket max.
  • Family: Deductible = $7,000, Coinsurance = 60%, OOP Max = $10,000
  • Exceeds minimum deductible; does not exceed out of pocket max.
  • Family: Deductible = $13,800, Coinsurance = 60%, OOP Max = $13,800
  • Exceeds minimum deductible; meets out of pocket max.

Examples for plans that don’t qualify as HDHP

Here are some examples of 2020 insurance plans that do not qualify as an HDHP and do not allow you to contribute to an HSA:

  • Self Only: Deductible = $1,350, Coinsurance = 20%, OOP Max = $6,960
  • X Lower than minimum deductible; exceeds out of pocket max.
  • Self Only: Deductible = $0 Coinsurance = 40%, OOP Max = $3,000
  • X Lower than minimum deductible.
  • Self Only: Deductible = $7,000, Coinsurance = 0%, OOP Max = $7,000
  • X Exceeds out of pocket max.
  • Family: Deductible = $2,700, Coinsurance = 25%, OOP Max = $13,900
  • X Lower than minimum deductible; exceeds out of pocket max.
  • Family: Deductible = $1,000, Coinsurance = 100%, OOP Max = $5,000
  • X Lower than minimum deductible.
  • Family: Deductible = $7,000, Coinsurance = 30%, OOP Max = $14,050
  • X Exceeds out of pocket max.

Note: I created TrackHSA.com to track medical expenses you pay using Health Savings Account as you spend up to your deductible or out of pocket max. It provides record keeping to store purchases, upload receipts, and record reimbursements securely online.

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2019 Form 8889 How To and Examples

If you made contributions to or distributions from your HSA in 2019, you will need to file the federal tax form 8889. This form is specific to HSA’s and records all activity with your HSA for the 2019 year. It flows to Form 1040 to adjust your income: your contributions reduce your taxable income, whereas any penalties adds back to income, increasing tax.

Form 8889 is not as straightforward as it could be, so I created a service called EasyForm8889.com that completes your form for you. I have also created the following video to walk through how to file Form 8889. Little has changed since the 2016 form used in this video. Check it out, otherwise, the transcription of the information is below.

Watch on Youtube: How to File HSA Tax Form 8889

In the following article we will cover:

Changes to 2019 Form 8889 tax form

The 2019 HSA tax form presents little difference to prior year tax forms. There were some minor look and feel changes you may notice, but nothing substantial in terms of substance. Throughout the form you will see the tax year incremented to 2010, so make sure you are working on the correct version. This can be confirmed in the upper right of the form. Contribution limits have increased in 2019, so these amounts are reflected throughout the form (specifically Line 3).

Changes to 2019 Form 8889 instructions

The 2019 Form 8889 instructions have been released by the IRS and can be found here. They are substantially the same as prior years save for year and contribution limit updates.

2019 HSA Contribution Limits

For self-only coverage, the maximum contribution limit increased by $50 to $3,500 in 2019. Family coverage also increased $100 to $7,000. There were no changes to the 55+ catch up contribution amount of $1,000. The IRS defines the maximum amounts that may be contributed to a Health Savings Account each year. Per IRS Publication 969:

The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you became an eligible individual, and the date you cease to be an eligible individual…for 2019, if you have self-only HDHP coverage, you can contribute up to $3,500. If you have family HDHP coverage you can contribute up to $7,000.

Here are HSA contribution limits for prior years:

Contribution Limit 2014 2015 2016 2017 2018 2019
Self-Only $3,300 $3,350 $3,350 $3,400 $3,450 $3,500
Family $6,550 $6,650 $6,750 $6,750 $6,900 $7,000
55+ Catch up +$1,000 +$1,000 +$1,000 +$1,000 +$1,000 +$1,000

The maximum contribution amount for your HSA in 2019 is $3,500 for self-only coverage and $7,000 for family. Note that this does not include the additional 55+ catch up contribution of $1,000 allowed to properly aged HSA holders. Thus, if you are over 55 on or before the end of 2019, you can contribute $4,500 for self-only coverage or $8,000 for family coverage.

2019 HDHP Definitions

To qualify as an HDHP, your health plan cannot exceed an out-of-pocket maximum limit established by the IRS. There were some changes to these amounts from 2018 to 2019. For self-only plans, the minimum deductible remained at $1,350 and the out of pocket maximum increased $100 to $6,750. For Family plans, the minimum deductible remained at $2,700 while the out of pocket maximum increased $200 to $13,500. Plans with a deductible below that specified are not HSA eligible, nor are plans with an out-of-pocket max greater than those listed. The HDHP definitions for recent years are summarized below:

2014 2015 2016 2017 2018 2019
Self-Only Min Deductible $1,250 $1,300 $1,300 $1,300 $1,350 $1,350
Self-Only OOP Max $6,350 $6,450 $6,550 $6,550 $6,650 $6,750
Family Min Deductible $2,500 $2,600 $2,600 $2,600 $2,700 $2,700
Family OOP max $12,700 $12,900 $13,100 $13,100 $13,300 $13,500


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2019 HSA Form 8889 example

Let’s walk through an example of the 2019 Form 8889 to show how it works.

Let’s assume I am a married 40 year old who had family HSA eligible coverage from January – June of 2019 (6 months). On July 1st, I changed to a non-HSA eligible plan. My spouse does not have their own Health Savings Account. I contributed $3,000 to my HSA and my employer contributed $500. I distributed $600 from the HSA during the year, all of which I spent on qualified medical expenses.

Part I – Contributions and Deduction

Form 8889 starts off pretty simply on Line 1 by asking the type of insurance you had (mostly) during the year. For this example, it is family. Line 2 then goes on to ask how much you contributed to your HSA during the year. In our case this was $3,000, which does not include employer contributions. Line 3 can be quite complicated, but in essence you need to list your contribution limit for the year. If you had self-only or family coverage all year, the amounts are provided for you. Otherwise, you need to prorate your coverage by month. In this case, we had family coverage for 6 months, so our contribution limit is $3,500 for 2019. Line 4 asks about Archer MSA’s (does not apply here) and Line 5 is a simple subtraction.

[Note: all 2019 tax forms were generated in minutes using EasyForm8889.com]

2019 Form 8889 Part 1 example

We continue with Line 6, which for self-only filers equals Line 5. For family coverage where both spouses have their own Health Savings Account, each of you needs to file your own Form 8889. Then on Line 6, you allocate the share of the contribution limit that belongs to that HSA. In this case, only the insured has an HSA, so this line equals Line 5. For some situations, Line 7 adds the $1,000 catch up contribution, but our example assumes the HSA holder is 40 years old so this does not apply. Line 8 is simple subtraction, and the $500 employer contribution comes into play on Line 9. If you contributed to your HSA from an IRA you would indicate that on Line 10, and Line 11 is simple addition. Line 12 is subtraction, and Line 13 does a comparison to calculate what your 2019 HSA deduction is, which makes its way to Form 1040. In our case, it is the $3,000 we contributed to the HSA. You will notice this excludes employer contributions since we do not get an addition tax benefit for those, although that would be nice.

Part II – Distributions

The second part of the 2019 Form 8889 deals with distributions, or amounts that came out of your HSA. We assume that we distributed $600 from the HSA, so that amount is shown on Line 14a. Line 14b lists rollover amounts and excess contributions that were removed, and Line 14c subtracts them out. The filer tracked his qualified medical expenses and receipts using TrackHSA.com this year, so he can easily prove to the IRS that all $600 in distributions were used for medical expenses, now or 10 years from now. He places that amount in Line 15. A subtraction occurs on Line 16 to determine any amounts not spent on qualified medical expenses; luckily that is $0 for us. If you had an amount on Line 16, Line 17a gives you the chance to exclude this from taxation based on a few exceptions. Otherwise, that Line 16 amount is taxed 20% on Line 17b, which gets recorded on Form 1040.

2019 Form 8889 part 2 example

Part III – Penalties and Taxes

For most people, Part III will look a lot like below: all zeroes. This is good, but it is possible that you have accrued some taxes and penalties. This is one of the most difficult sections to calculate so if this section applies to you, you may want to consider EasyForm8889.com.

If in the prior tax year, you 1) used the Last Month Rule and proceeded to 2) fail its Testing Period, a difficult calculation awaits you on Line 18. You are going to have to go back, figure out how much you contributed in the prior year, redetermine what you could have contributed without the Last Month Rule, and place the difference here. On a similar note, if you made a qualified funding distribution from your IRA in 2018 but failed its Testing Period in 2019, you will have to enter the amount that failed in Line 19. Once that is done, Line 20 adds Line 18 and Line 19 and adds it back to income (where it is taxed) on Form 1040. Finally, for good measure, Line 21 assesses a 10% penalty against the amount on Line 20, which also makes its way to Form 1040.
2019 Form 8889 Part 3 example

It is a lot but that is pretty much it. Remember that your name and social security # go at the top of the form. Happy tax day to all!

Note: if you need help with your 2019 Form 8889, or just want it done right now, please consider using my service EasyForm8889.com. It asks simple questions in a straightforward way and will generate your completed HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.


EasyForm8889.com - complete HSA Form 8889 in 10 minutes!

Changed HSA Custodian – Prior Year Contribution?


This question was sent in by HSA Edge reader Charlie:

I have had an HSA for a number of years. This year, in February 2019, I opened a new HSA at a different institution and transferred the balance from my old account. Now, I’m wondering can I make a contribution to this new HSA for 2018? I didn’t contribute to the old, closed account for 2018.

Contribution limit is by owner, not account

The short answer is, “Yes”, you can contribute to the new HSA given your eligibility last year. It does not matter at which bank (or, “custodian”) you make your HSA contribution, just that you were an eligible individual for the year in question. Just make sure you flag it as a prior year contribution to account for it in 2018 as opposed to 2019.

The reason is the HSA laws are not concerned with where you deposit the funds. Instead, they calculate the amount you are allowed to contribute, your contribution limit, by year and leave it to the account holder to contribute them to the HSA of their choice. In fact you can contribute that amount to multiple HSA’s (e.g. at different banks) if you like. There isn’t a relation or enforcement between the HSA you had open during the eligible period and where you must contribute the funds.

The only timing question related here is for qualified medical expenses. Per Form 969, qualified medical expenses (those payable with HSA funds) must occur after you open the HSA. All of your expenses would have occurred after you opened your original HSA, so this does not apply, but is something to keep in mind.


Note: If you need help preparing your HSA tax form 8889, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.


EasyForm8889.com - complete HSA Form 8889 in 10 minutes!