Health Savings Account & Flexible Spending Account
You can get tax advantages for both of these:
- Health savings accounts (HSAs) — Contributions are either:
- Tax-deductible — You can deduct these contributions even if you don’t itemize.
- Made with pre-tax dollars
- Flexible spending arrangements (FSAs) — Employment and federal income taxes aren’t 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 — Ex: deductible IRA contributions
- Made pre-tax — Ex: 401(k) contributions offered through an employer’s benefit plan
Earnings in the account aren’t taxed. Distributions you use 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 2019, the minimum deductibles are:
- $1,300 for self-only HDHP coverage
- $2,600 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
- Maintenance drugs
- Cancer screenings
- Must have a maximum annual out-of pocket expense that you can incur — For 2019 the maximum out-of pocket expenses are:
- $6,450 for self-only coverage
- $12,900 for family coverage
Other eligibility requirements include:
- 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 insurance for:
- Long-term care
There’s no earned income requirement.
If you meet all of the requirements, you can contribute to your HSA. For 2019, you can contribute amounts up to:
- $6,650 if you have family HDHP coverage
- $4,350 if age 55 or older
- $7,650 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:
- Doctor visits
- Over-the-counter medicines prescribed by your physician
- Laboratory tests
- Hospital stays
You shouldn’t use HSA funds for some other purpose. If you do, the distribution is taxed at ordinary rates with a 20% penalty. This applies for distributions you make after Dec. 31, 2010. There’s an exception if you:
- Become disabled
- Reach age 65
The HSA-HDHP combination isn’t for everybody. It has a high deductible, and you might not have enough to fund an HSA.
However, your medical expenses might be low, and you can contribute consistently to an HSA. If so, consider these extra advantages:
- HSA funds aren’t “use it or lose it,” like flexible spending accounts (FSAs). You can keep the funds in the account as long as you want 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 one-time rollover of IRA or unused FSA funds to help fund your HSA.
- HDHP premiums are often considerably lower than other common plans. This means 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 benefits as part of a cafeteria plan.
A health FSA allows you to be reimbursed for qualified medical expenses, including:
Usually, you fund your FSA by reducing your salary.
FSA benefits include:
- You can exclude contributions made by your employer from your gross income.
- Employment or federal income taxes aren’t 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:
- Designate how much you want to contribute at the beginning of the plan year.
- Have your employer deduct amounts, usually every payday. This will be done according to your annual designation.
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 amounts you or your employer contributes to the FSA. However, you must include in your income any contributions your employer makes for your long-term care insurance.
You usually forfeit money you contribute that you don’t spend by the end of the plan year. So, the money is use-it-or-lose-it. However, some plans give you an additional 2 1/2 months to use the money. Base your contribution on a sound estimate of the expenses you expect to have during the year. Due to the tax savings, an FSA might be to your advantage. This could still 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 $5,100 a year (or $2,550 for married filing separately).
You’ll receive a tax advantage with a health FSA. However, dependent-care FSAs are a trade-off between pre-tax deductions and tax credits — like the child and dependent care credit.
To learn more, see these tax tips:
- Child Tax Credit
- Medical and Dental Expenses
If you have Marketplace health insurance, you need to report qualifying life events or risk affecting your coverage and tax credits. Learn more at H&R Block.
Learn more about the additional medicare tax and if you are subject to paying the additional 0.9% on earned income from the tax experts at H&R Block.
Learn from H&R Block what you need to bring to your next tax appointment in order to have a successful visit.
You may think that DACA individuals are required to get health insurance under the ACA. That is actually not the case - learn more at H&R Block.