Is it “Open Enrollment” season at your office? (The time of year where you enroll, review and/or make updates to your benefits package?) In today’s climate of ever-rising medical care expenses, it can pay to set aside funds to help cover costs not addressed by your health insurance plan. Two widely available—but frequently misunderstood—accounts offered by many employers that can help reduce out-of-pocket health care expenses include Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). But what are they, how do they differ and, more importantly, what specific benefits do they offer for you and your qualified family members?
Editor’s note: Be sure to always check with your Human Resources Department for the most up-to-date information regarding your employer benefits.
What Are Flexible Spending and Health Savings Accounts?
FSAs and HSAs are unique savings accounts offered by many employers that help workers cover out-of-pocket health care expenses for themselves and family members by setting aside tax-free funds each pay period. These funds are used to address expenses including, but not limited to:
- Dental care (braces, crowns and more)
- Vision coverage for services like glasses, contacts and corrective eye surgeries
- Prices of prescription drugs, over-the-counter medications and vaccinations
- Medical equipment including wheelchairs, crutches, bandages, etc.
- Adaptive medical devices such as hearing aids and special telephone equipment
- Mental health care visits and counseling services
- Acupuncture or chiropractic care treatments
- Dependent care expenses
- Ambulance services
- Some deductibles and copays for health insurance
To learn more, access IRS publication 502, Medical and Dental Expenses which covers the full range of allowable expenses for both HSA and FSA.
HSA and FSA Benefits for You and Qualified Family Members
To fully appreciate the cost-saving benefits offered by both HSAs and FSAs, add up the amount you currently spend each year on some or all of the medical expenses listed above. The total amount may surprise you.
In addition to easing your out-of-pocket burden, both FSAs and HSAs offer a wide range of advantages which set them apart from traditional savings accounts. Among them:
- Withdraw funds without paying taxes: You can use the money in your HSA or FSA account to help cover qualified medical expenses without paying federal or state income taxes.
- Decrease your annual tax burden through pre-tax contributions: Since contributions come out of your paycheck before tax deductions, your overall taxable income will decrease. This feature lowers your annual tax burden because contributions will not factor into your total gross yearly income.
- Boost your annual income: With a lower tax bill, you will likely see an increase in your take-home pay. For example, if you earn $50,000 a year and pay 30 percent in annual federal and state taxes, you may end up increasing your take-home pay by nearly $800 annually if you took advantage of the maximum annual contributions to either your FSA or HSA account.
- Cover your qualified family members: Employees can often use these accounts to help cover a wide range of out-of-pocket medical expenses for a spouse, dependent or even adult children up to 26 years of age.
- Access your funds easily: Using the funds in your account is often as simple as swiping the debit card provided for your account or taking advantage of other payment options including checks, online bill payment and even out-of-pocket reimbursement.
Limitations and Key Differences Between FSAs and HSAs
While HSAs and FSAs both offer consumers an opportunity to offset health care costs, they also include several key differences, including:
- Eligibility and enrollment: There are no eligibility requirements to open an FSA, but you may only adjust your contributions during Open Enrollment season (typically end of the year; see your Human Resources department) or a significant life event such as a marriage, adoption or the birth of a child.
To qualify for an HSA, however, you must be enrolled in a High Deductible Health Plan (HDHP): For 2018, the IRS defines an HDHP as any plan with a deductible (an amount of money that the insured must pay before an insurance company will pay a claim) of at least $1,350 or $2,700 for a family. Annual out-of-pocket expense (like deductibles, copayments, and coinsurance) can also not be more than $6,650 for an individual and $13,300 for a family. Additionally, you may not enroll in a Medicare plan, no one else can claim you as a dependent for tax purposes, and you cannot be covered by a non-HDHP plan. Unlike an FSA, HSA contribution adjustments cay occur at any time.
- Fund rollovers: What happens to the unused funds in your HSA at the end of the year? Unlike an FSA, the funds in an HSA roll over to the next year, so you are not forced to deplete the account. This feature allows your balance to grow and mature every year. Conversely, FSA funds disappear at the end of the calendar year. However, some employers may offer the ability to extend the FSA period by up to two-and-a-half months or even allow a small portion of your contributions (up to $500 as of 2018), to roll over to the next plan year.
- Fund status when changing jobs: What happens to your account balance if you move on to another employment opportunity? Unlike an FSA, the funds in your HSA remain available even if you change jobs, retire or move to a completely different qualifying health insurance plan.
- Contribution limitations: Each calendar year, the IRS sets maximum contribution limits for these accounts for both individuals and families. For 2019, HSA limits are $3,500 for individuals and $7,000 for families. An additional $1,000 may be contributed as a “catch-up” contribution if age 55 or older. The maximum contribution limits for FSAs in 2019 are $2,700. (Families may qualify for an additional $5,000 if solely used for the dependent care account of an FSA plan.)
- Retirement: One of the best benefit of an HSA lies in its ability to help you save for healthcare needs in retirement. After the age of 65, you may withdraw all funds (contributions and interest earned) from your HSA without penalties. An FSA offers no retirement options since the funds in them do not roll over to the next calendar year if left unused.
Although FSAs and HSAs offer significant savings opportunities for individuals or families faced with covering out-of-pocket medical expenses, it pays to do your research, calculate your current out-of-pocket costs and, always consult with your Human Resources department to determine your eligibility for either account.
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