Choosing a Health Savings Account (HSA) or Flexible Spending Account (FSA)
There are many factors to take into consideration before choosing a Health Savings Account (HSA) or Flexible Spending Account (FSA). Taking advantage of one of these accounts allows you to deduct out-of-pocket medical expenses. Without an HSA or FSA, generally only the amount that exceeds 10% of adjusted gross income can be deducted by those who itemize.
Health Savings Accounts
Health Savings Accounts (HSAs) can be very advantageous for both individuals and families who purchase their own insurance, and employers and employees. HSAs are designed for individuals to make contributions to the account to then use those funds to pay for qualified medical expenses. HSAs can be opened with a brokerage firm, a bank, or other providers such as insurance companies.
To be eligible for an HSA, you must be enrolled in a high deductible health plan (HDHP). For 2015, if the deductible for health insurance is $1,300 or more for an individual or $2,600 or more for a family, the insurance is considered to be a HDHP. The HDHP must also be the only health insurance plan that the individual has. An individual also cannot be claimed as a dependent on another taxpayer’s tax return and cannot be eligible for Medicare.
HSAs are quite beneficial because individuals can make tax-deductible contributions into an HSA account. You may also have the option of having your contributions taken out of your pay pretax. Contributions can be made for any month a HDHP is held during a given year and the contribution amount can be changed at any time. Contributions made in 2015 are capped at $3,350 for individuals and $6,650 for a family (with an additional $1,000 allowed for those 55 and older). If the entire amount contributed for a year is not all used in that same year, the unused balance will roll over in to future years. HSAs also follow individuals even if they change employment. Because of these provisions, an HSA can be another vehicle for savings in retirement when your health costs are likely to rise. When money is withdrawn from the account to pay eligible health care costs, contributions and earnings are withdrawn tax-free.
Flexible Spending Accounts
A Flexible Spending Account (FSA) is another option, which is similar to an HSA with a few exceptions. Similar to HSAs, contributions for FSAs are pretax and distributions are not taxed. Unlike HSAs, anyone covered by an employer-sponsored FSA can contribute to the plan. Insurance plans do not need to be considered HDHPs. Contribution limits for FSAs are lower than HSAs. For 2015, FSA contributions are capped at $2,550. Contrary to the name, FSAs are not as flexible as HSAs. If changes need to be made for FSA contributions, they must be done at open enrollment time or be completed with a change in family status or employment. If the entire amount contributed to an FSA for a year is not used within the year (with optional grace period), there is no perk of rolling the funds over to the next year. Any unused balance will be forfeited. Unless an individual is eligible for FSA continuation through COBRA, the FSA will be lost when employment changes.
Beware of using HSA or FSA funds for nonqualified medical expenses, taxes and penalties will apply on the distributions. Please note that these savings accounts can still be used under the new Affordable Care Act (ACA) rules.
For more information about Health Savings Accounts and Flexible Spending Accounts, please contact an Anders advisor.