Article by Alan Fijalkowski
In my previous article, we discussed choosing a primary health care plan for your unique needs. However, the protection and coverage are not limited to just health care plans. There are numerous supplemental options available that you may want to consider, and the ones we are going to talk about this time are the different forms of saving and spending accounts that can help you save money.
Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are two programs that allow the subscriber to spend pre-tax income on qualified health and wellness expenses. This allows a subscriber to save on federal taxes each year for the money used on health care expenses. However, the two programs are not interchangeable, and in the case of the HSA, you may not even qualify.
An FSA is offered by many employers and insurance carriers, which allows you to establish a deduction from your regular paycheck to be held for your spending account. The contributions are not taxed, meaning if you contribute the maximum of $2,650 per year to an FSA, you will save an estimated $795 in federal taxes. The funds are front-loaded at the beginning of the year, allowing you to utilize it over the calendar year, or all at once if a significant medical expense is incurred. Reimbursements are eligible for a wide variety of medical items, such as co-pays, prescription coverages, over-the-counter consumables (bandages, braces, sanitizers), thermometers, eyeglasses or contacts, dental work, blood pressure monitors, defibrillators, massage, and mileage costs to and from appointments. You can even use it to purchase exercise equipment under most plans, provided a physician signs a letter of medical necessity for the device.
Another benefit of FSAs is the option to establish a separate account for dependent care. This is used for childcare expenses such as daycare, camps, or professional nanny services. There is a limit that is determined by your filing status, which may change year to year. Typically, the limits are $2,500 for an individual and $5,000 for a family filing status. This is in addition to the medical expenses section of the account, meaning it is possible to pay for all medical and childcare expenses with pre-tax income, saving almost $2,000 of your hard-earned money per year.
An HSA is basically a savings account. This means that the amount you save can vary, the funds do not expire or terminate, and your funds can gain interest. HSAs are only available to individuals or families who fall under the definition of a “high-deductible health plan,” which is defined by the IRS (for the tax year 2019) as an individual deductible of $1,350 for individuals or $2,700 for families. Like an FSA, the funds you save can be used to cover eligible medical expenses. The big difference between the HSA and the FSA is the ability to roll savings over into the following year. This allows the account to act more like a savings account than an expense account. There is no “use-it-or-lose-it” risk, and there’s a triple-tax benefit: The funds are contributed pre-tax, the account bears interest and gains without tax, and there is no tax on withdrawing the funds for medical expenses.
Additionally, anyone over the age of 65 can withdraw funds for any expense or reason without penalty. Still, costs that are not medical in nature will be subject to income taxation at this point. This makes an HSA another vehicle for retirement savings for those who qualify. Additionally, if an employer contributes to your HSA, it does not count toward your annual savings limit.
Although it is implausible that anyone would qualify for both an HSA and an FSA at the same time, having either as an option is a benefit that should be considered. With the FSA not allowing more than a $500 rollover, it is essential to estimate how much you’d spend on medical expenses in a given year in order to avoid losing the contributions altogether. Families or individuals with hefty costs may want to max out their contributions to allow the most savings. People with fewer expenses may want to consider starting off low until they determine how much they plan to spend during the year. The critical part to remember is there are so many things that can be purchased with these funds—it is challenging to not spend it all. From add-ons to your new eyeglasses, to the new TENS unit for workout recovery, and that beautiful first-aid kit you want to keep in your car, it’s all covered.
To get the best and most definitive answers in the most confusing legal jargon available, take a look at IRS Publication 969, which outlines the legal and financial aspects of each plan.