Health savings accounts (HSAs) are powerful tools for managing health care costs. They can provide unique tax benefits, and they offer a way to earmark funds for medical expenses, which might be helpful for budgeting. That said, they can be a bit complicated. If you're hoping to fully utilize an HSA, it's important to understand the HSA max contribution and the factors that may limit your contributions.

What Is an HSA?

An HSA allows you to save for health care costs on a tax-favored basis. These programs can include the following highlights.

• Contributions can go into the account pre-tax, reducing your taxable income.

• Growth on the account is tax-deferred.

• Qualifying withdrawals come out tax-free.

While the potential tax benefits are appealing, you must meet specific requirements to fully take advantage of an HSA. You must have a certain type of health insurance — a high deductible health plan (HDHP) — to be eligible to contribute. These plans have a high deductible and limits on out-of-pocket expenses.

And, withdrawals from your HSA qualify for tax-free treatment only when you spend the money on qualifying expenses. While many health-related costs are eligible, it's important to verify that expenses qualify before taking a withdrawal.

Because HSAs can be complicated, it's critical to review your HSA strategy with a tax professional before making contributions or taking distributions.

HSA Max Contribution Limits

The IRS sets maximum limits on how much you can contribute to an HSA for each calendar year. For 2022, that amount is $3,650 for self-only coverage and $7,300 for families covered by an eligible plan.

People 55 or older during the year can make an additional catch-up contribution of $1,000. Note that the age 55 catch-up is different from the age 50 catch-up available for certain retirement accounts.

The annual limit changes periodically to adjust for inflation. For instance, in 2017, the limit was $3,400 for individuals and $6,750 for family coverage. Keep an eye out for IRS announcements to stay updated on how much you can add to your account.

What Factors Affect Your HSA Max Contribution?

Depending on the circumstances, you might not be allowed to contribute the full amount to your HSA. Several factors can limit the amount you get to contribute.

Employer Contributions

If your employer contributes to an HSA on your behalf, those additions count toward the annual limit. For example, assume you're on an individual plan, and your employer puts $1,000 into your HSA. In that case, you would be allowed to contribute up to $2,650 because the employer already used up $1,000 of the $3,650 limit. That's a nice problem to have, but it's critical to note.

Partial-Year Coverage

If you're only covered by a qualifying HDHP for part of the year, the IRS might limit how much you're allowed to contribute to an HSA. For example, say you have individual HDHP coverage for the first six months of the year, but you change jobs and lose access to the HDHP. In that case, you might only be allowed to contribute half of the annual limit because you were covered for half of the year. Your contributions are generally limited on a pro-rata basis (so three months of coverage would allow you to contribute up to 25% of the maximum).

However, there's an exception that might allow you to contribute the full annual amount, even if you aren't covered by an HDHP for the full year. If you're covered for the last full month of the year, as well as the following 12 months, you may be eligible under the so-called "last month rule."

Other complications could also arise. Ultimately, it's critical to verify your eligibility with a tax expert and double-check the numbers to avoid problems.

The Bottom Line

HSAs have unique tax features that can potentially help to reduce the amount you pay for health care. However, there are limits on how much you can contribute. If you're thinking of using an HSA, start by verifying your eligibility to contribute, and then figure out how much you might be allowed to add to your account each year. Be sure to monitor any employer contributions, inflation adjustments and changes in your health coverage to make sure you don't overcontribute.