In this week’s blog, Financial Planner Kerrie Beene, CFP® defines two benefit terms that often cause confusion:
The products available to us in the financial and healthcare industry can be confusing. So, with the use of Health Savings Accounts (HSA’s) and Flexible Spending Accounts (FSA’s), we are combining the two worlds and this can be overwhelming when trying to pick a health care plan. Healthcare plans vary from job to job and state to state, but most of the time the options include health care plans with HSA’s and FSA”s as one of the available plans, along with other plans. So what is the difference and should I choose one of these options?
Similarities
Both HSA’s and FSA’s are used in conjunction with your health care plan.
Both also reduce your income tax liability and help pay for medical expenses with pre-tax dollars
You and your employer can deposit money into the account
Debit/Credit Card offered to pay for expenses
Must maintain receipts and records for expenses
Health Savings Account
Used in conjunction with a High-Deductible Plan
For 2019, the IRS defines a high deductible as $1,750 for individuals and $2,700 for a family
For 2020, the IRS defines a high deductible as $1,800 for individuals and $2,800 for a family
Available to self-employed individuals
Money deposited into the HSA is tax-deductible
Interest and earnings are tax-free
Withdrawals used to pay for medical expenses are tax-free
Withdrawals can be used for medical expenses, such as doctor visits, hospital stays, eyeglasses, contacts, dental procedures, prescription drugs, etc.
HSA’s are portable
The account belongs to you
You keep it even if you switch jobs
Money remains in the account from year to year, even if not used
Money can be invested within the account
HSA funds can be used to pay insurance premiums if you are collecting federal or state unemployment benefits or you have COBRA insurance through a former employer
The IRS also imposes contribution limits on the amount that can be deposited into an HSA account
For 2019, the maximum contribution is $3,500 for individuals and $7,000 for families, with a $1,000 catch-up amount for those 55 and older (including employer contributions)
For 2020, the maximum contribution is $3,550 for individuals and $7,100 for families, with a $1,000 catch-up amount for those 55 and older (including employer contributions)
Flexible Spending Account
Used in conjunction with a Health Care Plan
Not available to self-employed individuals
Money deposited into the FSA is tax-deductible
Withdrawals used to pay for medical expenses are tax-free
Withdrawals can be used for medical expenses, such as doctor visits, hospital stays, eyeglasses, contacts, dental procedures, prescription drugs, etc.
FSA’s are not portable
The account belongs to your employer
Money must be used by the end of the year or you lose it
There are a few exceptions some employers offer, such as being able to carry-over $500 or a 2.5 month grace period to use the funds. (Employers can offer either option, but not both)
The IRS also imposes contribution limits on the amount that can be deposited into an FSA account
For 2019, the maximum contribution is $2,700
For 2020, the maximum contribution is $2,750
Employers often offer other types of FSA accounts
Dependent Care Account - used to pay for eligible child and adult care expenses like daycare, before and after school care, nursery school, preschool, and summer day camp
Other FSA Accounts
Adoption Assistance
Transit and Parking
The most important things to do when trying to pick a health care plan:
Understand your available options
Know your annual healthcare expenses
Understand the requirements for required documentation for tax purposes
Don’t be scared to ask questions