Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs) in header of articles
Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs) in content page of articles
The tax advantages of opening both of these include:
Health savings accounts (HSAs) -- Contributions are either tax-deductible or made with pre-tax dollars. Your tax-deductible contributions are deductible even if you don’t itemize.
Flexible spending arrangements (FSAs) -- No employment or federal income taxes are deducted from your contributions.
An HSA is a savings account used to pay out-of-pocket medical expenses. Contributions to your HSA are either of these:
Tax-deductible, like deductible IRA contributions
Made pre-tax if the HSA is offered through an employer's benefit plan, like 401(k) contributions
Earnings in the account aren't taxed. Distributions used to pay for qualified medical expenses are tax-free.
To qualify to contribute to an HSA, you must have a high-deductible health plan (HDHP). The HDHP:
Must have a high deductible -- For 2012, the minimum deductibles are:
$1,200 for self-only HDHP coverage
$2,400 for family coverage
Can't pay medical benefits until the deductible is satisfied -- A medical plan that pays for certain items without regard to the deductible isn't a qualifying HDHP. Items might include prescription drugs or office visits.
However, exceptions exist for preventative or wellness benefits, like:
Basic health check-ups
Must have a maximum annual out-of pocket expense that you can incur -- For 2012 the maximum out-of pocket expenses are:
$5,950 for self-only coverage
$11,900 for family coverage
Other eligibility requirements:
You can't be a dependent on another person's return.
You can't have any other type of health insurance coverage.
You can't be enrolled in Medicare.
Certain coverage is allowed, including dental, vision, and long-term care insurance.
There's no earned income requirement.
If you meet all of the requirements, you can contribute to your HSA for 2012 amounts up to:
$6,250 if you have family HDHP coverage
$4,050 if age 55 or older
$7,250 if you have family HDHP coverage and are 55 or older
You can use your HSA funds tax-free to pay for out-of-pocket medical expenses, including:
Over-the-counter medicines prescribed by your physician
However, if you use HSA funds for some other purpose, the distribution is taxed at ordinary rates with a 20% penalty. This applies for distributions you make after Dec. 31, 2010, unless you become disabled, die, or reach age 65.
Since it has a high deductible, the HSA-and-HDHP combination isn’t for everybody.
Ex: You’d have to pay a great deal out-of-pocket until your HDHP deductible is met if you’re:
Taking several prescription medications
Expecting to visit the doctor several times during the year
Or with an HDHP, you might not have enough to fund an HSA.
However, your medical expenses might be relatively low and you're able to contribute consistently to an HSA. If so, consider these advantages on top of the tax advantages:
HSA funds aren’t use it or lose it, unlike flexible spending accounts (FSAs). You can keep the funds in the account as long as you wish and use them only when you need to.
There's no waiting period before you can begin taking tax-free distributions, unlike Roth IRAs.
You might be eligible for a 1-time rollover of IRA or unused FSA funds to help fund your HSA.
HDHP premiums are often considerably lower than traditional health-plan premiums. With lower premiums, you might have additional funds to handle the HDHP deductible and fund the HSA.
Employers might fund some or all of the HSA for you. Employer contributions are tax-exempt.
A health FSA is an employer-established benefit plan. Your employer can offer them with other employer-provided benefits as part of a cafeteria plan.
A health FSA allows you to be reimbursed for qualified medical expenses, including:
Over-the-counter medicine (This allowance expired at the end of 2010 with the exception of insulin.)
FSAs are usually funded through voluntary salary reduction agreements with your employer.
FSA benefits include:
You can exclude contributions made by your employer from your gross income.
No employment or federal income taxes are deducted from the contributions.
Withdrawals might be tax-free if you pay qualified medical expenses.
You can withdraw funds from the account to pay qualified medical expenses. You can do this even if you haven’t yet placed the funds in the account.
To contribute to your FSA:
At the beginning of the plan year, designate how much you want to contribute.
Your employer will deduct amounts periodically, usually every payday. This will be done in accordance with your annual election.
You can change the amount you designate at the beginning of the plan year only if a specified event occurs, like:
Birth or death of a child
Loss of coverage under other insurance
Change in employment status
You aren't taxed on the salary you contribute or the amounts your employer contributes to the FSA. However, you must include in your income any contributions made by your employer for long-term care insurance.
You usually forfeit money you contribute that you don’t spend by the end the plan year. So, the money is use-or-lose. However, some plans allow you an additional 2 1 / 2 months to use the money. Base your contribution on a reasonable estimate of the expenses you expect to have during the year. Due to the tax savings, an FSA might be to your advantage. This might be true even if you'll have to forfeit a small amount of money.
You must provide the health FSA with a written statement from an independent third party stating both:
The fact that you’ve incurred the medical expense
The expense amount
You must also provide a written statement that the expense hasn’t been paid or reimbursed under any other health-plan coverage.
You can establish an FSA to pay for dependent care, like childcare. The amount you can set aside for dependent-care FSAs usually is limited to $5,000 a year.
You'll receive a tax advantage with a health FSA. However, dependent care FSAs are a tradeoff between pre-tax deductions and tax credits, like the child and dependent care credit. The higher your income, the lower your child and dependent care credit usually is due to income phase-outs.