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November 7, 2017

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.

HSA Eligibility

To be eligible for an HSA, you must be enrolled in a high deductible health plan (HDHP). In order for a health care plan to be considered an HDHP it must meet the following requirements:

  • Annual deductible for 2017 is no less than $1,300 for self-only coverage and $2,600 for family coverage
  • The maximum out-of-pocket deductible and other expenses for 2017 is $6,550 for self-coverage and $13,100 for family coverage

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.

HSA Benefits and Contributions

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 pre-tax. 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 2017 are capped at:

  • $3,400 for individuals
  • $6,750 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 into 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 When money is withdrawn from the account to pay eligible health care costs, contributions and earnings are withdrawn tax-free.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 pre-tax and distributions are not taxed.

FSA Eligibility

Unlike HSAs, anyone covered by an employer-sponsored FSA can contribute to the plan. Insurance plans do not need to be considered HDHPs. 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.

FSA Benefits and Contributions

Contribution limits for FSAs are lower than HSAs. For 2017, FSA contributions are capped at $2,600.

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.

Qualified Medical Expenses for HSAs and FSAs

Funds distributed from an HSA and FSA can only be used for qualified medical expenses (QMEs).  QMEs include your deductibles, medical expenses not covered by your insurance, prescription drugs, vision, and dental care. Should you take a distribution that is not related to a QME, you will incur a 20% penalty on distribution plus pay the required income taxes on said distribution.

For more information about Health Savings Accounts and Flexible Spending Accounts, please contact an Anders advisor.

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