In my last blog, I talked about open enrollment. One of the items that many employers offer for benefits is either a Flexible Spending Account (FSA) or Health Savings Account (HSA). Are you familiar with FSAs/HSAs and how they are used? If not, read on for more information.
FSAs
An FSA is an account that you can use to save for health-related expenses/medical costs. You can withhold pre-tax dollars from your paycheck to an FSA account to cover qualified medical expenses. A list of qualified medical expenses can be found here. The primary benefit of an FSA is the tax savings. Money in the account can cover costs for yourself, your spouse/partner (depending on the plan), and qualified dependents (such as kids you claim on your tax return), even if they are not on your health insurance.
Other things to note:
- You can enroll in an FSA with any health insurance plan. And believe it or not, you can even set up an FSA with no insurance plan. (However, you can’t usually contribute to both an FSA and an HSA; there are specific rules).
- The contribution limit for 2019 for a healthcare FSA is $2,700.
- Your spouse can have an FSA at the same time and contribute up to $2,700.
- A Dependent Care FSA allows you to contribute money to pay for child/dependent care expenses such as daycare, after school care, and camps. The annual limit is $5,000 and the dependent must be under age 13 OR physically/mentally unable to care for themselves.
There is a big con with FSAs, though. If you don’t use the money in the calendar year in which it was contributed, you lose it. (Technically, it goes back to your employer.) However, there are 2 things that can help, depending on whether your employer’s plan offers them:
- You can carryover a certain amount of unused funds to the next plan year. (The amount allowable is up to $500. This amount is set by your employer.)
- You have 2.5 months in the new plan year to spend any leftover FSA money from the prior plan year.
So, if you are enrolled in an FSA this year, and have money left to use up, don’t hesitate! The clock is ticking.
Here’s something crazy to help you with that. There is a store dedicated to selling items that are FSA eligible. Their website lets you browse by product category. Here are some examples of eligible products I found on that site that you might not think about:
- Condoms
- Baby Monitors
- Fancy sunscreen
- Foot rollers
- First Aid Kits
- Himalayan Salt
HSAs
A Health Savings Account can only be used in conjunction with a high-deductible insurance plan. If you have an eligible plan, you can set up an HSA. It’s usually set up through a bank, and you can contribute through payroll deduction, and receive triple tax savings on money you put into the plan. How is that possible, and what do I mean by triple tax savings?
- You will not pay taxes on any contributions you make (same as the FSA).
- HSA contributions grow tax-free (interest and dividends earned on this money are not subject to taxes).
- If you take money out of your HSA for qualified medical expenses, the distributions are tax-free as well.
Some items I also wanted to point out:
- Contribution limits for an HSA (as of 2019) are $3,500 for individuals, and $7,000 for families.
- You can leave money in an HSA and/or use it at any time. We used to have a high-deductible plan, switched to a “regular” deductible plan, and I left my money where it was in the HSA. I can continue to use my HSA funds for qualified medical expenses with the tax-free distribution rules. So, any money you contribute is available long-term.
- If you take money out of an HSA and don’t use it for qualified medical expenses, there is a 20% penalty on the distribution amount and the entire distribution is considered taxable income.
- Once you turn 65, you can withdraw money for any purpose, not just medical expenses, without the 20% penalty. However, if you don’t use the money for medical expenses, it’s still considered a taxable distribution.
Unlike an FSA, the money you put into an HSA can rollover from year to year, so you don’t have to worry about spending it before the year is up.
One final thing to note is that you should name a beneficiary for an HSA, someone who would receive the money if you were to pass away. With an FSA, the money can only be used for medical expenses that you incurred, so your beneficiaries wouldn’t be able to receive the extra cash.
Happy spending!
Any opinions are those of Jill Carr and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Shares acquired via an exercise of employee stock options are subject to resale restrictions. Restricted stock is non-transferable and must be traded in compliance with special Securities and Exchange Commission (SEC) regulations.
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