Significant Changes to CPF MediSave Cash Top-Ups and Tax Relief Strategy

A CPF (Amendment) Bill passed in Parliament in November 2021 had set the personal finance community abuzz. That is because CPF is an emotive topic and affects all Singaporeans and Singapore Permanent Residents. Even though the changes were made to simplify the current CPF system, confusion still reign amongst the populace. Several articles have also been published to explain the CPF changes but I thought I can possibly value add by providing some examples and strategies. As each reader’s circumstances differ, peppering it with various scenarios would make bring the changes to life and make them more relatable.

In an attempt to keep the article simpler, I will only focus on 3 changes affecting Voluntary Contribution (‘VC’) to CPF MediSave and tax reliefs. Here are the significant changes to CPF MediSave cash top-ups and your tax relief strategy.

1. New MediSave Top-up Limits

From 1 Jan 2022, the amount that CPF members can top up to his/her MediSave (‘MA’) will be determined by just 1 formula:

[Existing Basic Healthcare Sum (‘BHS’) minus Member’s current MediSave balance].

Previously, CPF members have to consider BOTH the CPF Annual Limit (which is $37,740) and BHS for top-ups to MediSave. Let’s go through some examples to understand the latest change by assuming BHS to be $63,000, which is the limit for Year 2021.

With reference to Diagram 1, member in Example 1 is able to contribute $23,000 into his/her MA. This number is derived by applying the new formula: BHS less Current MA balances ($63,000 – $40,000 = $23,000)

In Example 2, CPF member is unable to make any further cash top up as his/her current MA balances is already at the BHS Limit.

In Example 3, the CPF Member can now top up $63,000 into his/her MA balance. Previously, this would NOT have been possible as a $63,000 top up exceeds the CPF Annual Limit of $37,740.

Heartland Boy’s Take – How This Change Has Simplified The CPF System

There is now no longer a need to consider CPF Annual Limit which is typically made known only closer towards the end of each year due to uncertainty over bonus, fixed salary etc). This also means that the previous worry of “over-topping” cash into your MA and have it refunded the following year interest-free will not happen anymore. I have experienced this before as I often contribute cash to my CPF MediSave to enjoy tax relief.  As a result, my MA has also reached Basic Healthcare Sum limit in 2021.

From 1 Jan 2022, the simple mantra is to quickly top up cash into your MA whenever it dips below the BHS. I can think of 4 specific circumstances whereby members who have reached the BHS limit can do a top-up to their MA as shown in Diagram 2.

a) On Jan 1^st – the higher BHS limit for that year will take effect on this day and you have a narrow window of opportunity to top up to the new BHS Limit.

b) In Oct – there will be a deduction in your MA to pay for CareShield Life’s premiums, which is a compulsory national severe disability insurance programme

c) During the year, whenever there is a deduction of your MediShield and Integrated Shield Plan’s premiums.

d) During the year, whenever there is a deduction of loved ones MediShield and Integrated Shield Plan’s premiums. (For eg, I pay for my child’s integrated shield plan because her MA attracts 6% interest rate!)

Secondly, cash-rich CPF members can now make a cash top up to their MA/loved ones’ MA up to the BHS Limit. With reference to Example 3 in Diagram 1, I can imagine cash-rich parents with great conviction of the CPF system doing a one-time cash top-up for their new-borns. Speaking with experience, I regularly take Olympia’s angbao monies to top up into her CPF MediSave account. In a wholly unexpected scenario whereby her angbao monies exceed $37,740 in a particular year, I would have no excuse not to top it up into her MA under the new change.

2. Giver To Benefit From Cash Top-Up To Loved One’s MediSave

Since we are on the topic of performing a cash top-up to loved ones’ MediSave, giver will now be eligible to enjoy tax relief from 1 Jan 2022.

Previously, it was the recipient who would have obtained the tax relief instead.

Heartland Boy’s Take – How This Change Has Simplified The CPF System

With this revision, it makes it consistent with the Retirement Sum Topping-Up Scheme where it is also the case of the giver who enjoys the tax relief. This is positive because we now only need to remember that it is always the giver who benefits from topping up a loved one’s CPF account, whether it is the Special Account (‘SA’), Retirement Account (‘RA’) or MA.

To qualify for tax relief when performing a cash top up to a loved one’s CPF MA, please refer to Diagram 3.

Notice that child has been excluded from the definition of loved ones by IRAS/CPF. Therefore, I am fully aware that my years of topping up my child’s MA online does not and will not provide tax relief going forward too.

3. Tax Relief Capped at $8,000 (top-up to self) + $8,000 (top up to loved ones)

On the topic of tax relief, the latest change means that CPF member can now enjoy up to $8,000 tax relief for cash top-up to own CPF account. In addition, the member can enjoy another $8,000 when he/she performs a cash top-up to loved ones’ CPF accounts. This $8,000 cap is applicable for top-ups to SA, RA and MA. In total, the amount of tax relief cash top-ups will be a total of $16,000. Similarly, these changes will also take effect from 1 Jan 2022.

The changes here are twofold:

A) Previously, tax relief was capped at $7,000 for cash top-up for self and another $7,000 for cash top-up to loved ones’ CPF accounts.

B) Secondly, this $7,000 cap was only applicable for cash top-ups made to SA and RA. It DID NOT include MA. If you are curious to know, applicable tax relief for a VC to MA prior to this change was a pretty complex formula, being the lowest of these 3 equations:

1. Voluntary MA top up (cash); or
2. Annual CPF Contribution Limit (calculated from Feb to Jan) less mandatory CPF contribution; or
3. Current BHS less the balance in your MA before you make the VC

Heartland Boy’s Take – How This Change Has Simplified The CPF System

By including MA as part of cash top-up to CPF to qualify for tax relief, this has definitely simplified the calculation of tax relief under this category. Typical of any changes where trade-offs have to be made, winners and losers will emerge from the change. I have brainstormed several examples in Diagram 4 and you might want to pay particular attention on how this affects your tax relief strategy.

Here is an explanation of all the examples that I have worked out.

Example A – CPF member has BHS in MA and also Full Retirement Sum (‘FRS’) in SA/MA. Previously, any tax relief resulting from cash contribution to loved ones’ CPF accounts is capped at $7,000. This has now been expanded to $8,000. Heartland Boy is definitely looking forward to an extra $1,000 tax relief when performing a cash top up to his parents’ CPF.

Example C – CPF member has no BHS in MA and no FRS in SA/MA. He/she would have enjoyed $7,000 under RSTU (self) + applicable tax relief for VC made to MA (self). Assuming that he/she does not max out his/her CPF Contribution Limit, this aggregated tax relief is likely to be higher than the revised $8,000 cap,

Example D – CPF member has BHS in MA but not FRS in SA/MA. He/she would have enjoyed $7,000 under RSTU (self) + applicable tax relief for VC made to MA (self). Assuming that BHS rises by $3,000 per year and that CPF member does not max out his/her CPF Contribution Limit, the aggregated tax relief is likely to be higher than the new $8,000 cap.

Examples B and E– For the eagle-eyed ones, you would have noticed that the CPF situation of Examples B and E are exactly the same, i.e. Member has FRS in SA/RA but not BHS in MA. However, depending on the calculation of tax relief for a voluntary contribution to MA under the previous regime, the win-lose outcome could swing either way.

In an extreme example, an unemployed person with low MA balances could potentially enjoy more than $8,000 in tax relief when performing a cash top up to his MA. However, under the new regime, his tax relief will be capped at $8,000 as shown in Example E.

On the contrary, a gainfully employed high-income worker who consistently maxes out his/her CPF Contribution Limit from his mandatory contribution may now enjoy up to a maximum of $8,000 in tax relief when performing a cash top up to his MA. Before the revised ruling, his tax relief is likely to be significantly lesser than $8,000. This would place such a persona under Example B.

Conclusion

CPF is notoriously difficult to grasp, so for a TDLR version of the changes to CPF in 2022, you may like to watch this video by CPF. For those with queries, do drop a comment and I try my best to clarify them to my best knowledge. Remember to take these changes into account when planning for your tax reliefs next year!