A health Flexible Spending Account (FSA) is an employer-sponsored benefit that allows eligible employees to save pre-tax dollars to pay for qualified medical expenses. Employees can elect a specific dollar amount, up to a certain limit, to set aside annually. This amount is available to them from the start of the calendar year. The employer recovers the elected amount through pre-tax payroll deductions throughout the year.
Health FSAs are typically “use-it-or-lose-it,” meaning unused funds are forfeited at the end of the plan year. To mitigate this, plan sponsors may offer one of two options:
- A “grace period” of up to 2 ½ additional months to utilize remaining FSA funds.
- A carryover provision that allows participants to transfer a certain amount of unused funds into the next plan year.
Each year, the IRS sets maximum contribution limits for FSAs. Plan sponsors can choose to limit contributions to a lower amount or allow employees to contribute up to the IRS maximum.
|Health FSA $3,200
|Carryover Limit $640
A Health Savings Account (HSA) is a tax-advantaged savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. HSAs are owned by the individual who establishes them, and contributions can be used to pay for qualified medical expenses that occur during the year the contributions were made or at a future date. HSAs also allow the individual to earn tax-free interest or other earnings on the assets in their account.
To contribute to an HSA, you must be an eligible individual. An eligible individual is someone who:
- Is covered by a high-deductible health plan (HDHP) on the first day of the month.
- Does not have other health coverage except what is permitted under Other health coverage in IRS Publication 969.
- Is not enrolled in Medicare.
- Cannot be claimed as a dependent on someone else’s tax return.
HSAs can be contributed to on a tax-free basis through salary reductions alongside a Premium Only Plan (POP) through an employer, or by claiming tax exemptions on IRS Form 1040. An employer, family members, or any other person can also contribute to an eligible individual’s HSA, but the total amount contributed cannot exceed the IRS’s annual limits.
Anyone who is 55 or older and not enrolled in Medicare is allowed to make an additional catch-up contribution, in addition to the regular contribution limits set by the IRS.
Benefits of HSAs
HSAs offer a number of benefits, including:
- Tax-free contributions
- Tax-free withdrawals for qualified medical expenses
- Tax-free earnings on the assets in the account
- No expiration date on contributions
- Funds can be used to pay for qualified medical expenses of the account holder, their spouse, and dependents
How to Open an HSA
You can open an HSA at a bank, insurance company, or other financial institution that offers HSAs. Once you have opened an HSA, you will need to choose a trustee to manage your account. The trustee will be responsible for investing your contributions and distributing funds to you when you need them.
A high-deductible health plan (HDHP) is a health insurance plan that has a higher annual deductible than typical health plans. This means that you will have to pay more out of pocket for covered medical expenses before your insurance starts to pay. However, HDHPs typically have lower monthly premiums than traditional health plans.
In addition to a higher deductible, HDHPs also have a maximum limit on the total amount of money you will have to pay out of pocket for covered medical expenses in a year. This is known as the out-of-pocket maximum. Once you reach your out-of-pocket maximum, your insurance will pay 100% of your covered medical expenses for the rest of the year.
HDHPs may also provide preventive care benefits without a deductible or with a deductible that is less than the minimum annual deductible. This means that you will not have to pay as much out of pocket for preventive care services, such as checkups, immunizations, and screenings.
HDHPs can be a good option for people who are healthy and do not expect to have a lot of medical expenses. They can also be a good option for people who are on a budget and are looking for a lower-cost health insurance option.
Here are some of the pros and cons of HDHPs:
- Lower monthly premiums
- Preventive care benefits may be covered without a deductible
- Out-of-pocket maximum protects you from catastrophic medical expenses
- Higher deductible
- You may have to pay more out of pocket for covered medical expenses before you reach your deductible
- HDHPs may not be a good option for people who have chronic health conditions or who expect to have a lot of medical expenses