When most of us think about medical emergencies we focus on the cost: is our health insurance adequate to cover the needed treatments. Our concern centers on premiums, deductibles, and co-pays. The potential for tax advantages is another element to consider. Two health care plans - Health Savings Account (HSA) and Flexible Savings Account (FSA) – reduce income tax liability. Both of these accounts let you pay less taxes and save on health care expenses.
HSA’s and FSA’s are tax advantage accounts. Both HSAs and FSAs allow people with health insurance to set aside pre-tax money for health care costs referred to as “qualified expenses,” including deductibles, copayments and coinsurance, and monthly prescription costs. However, there are several essential differences between HSAs and FSAs.
Flexible Spending Accounts (FSAs):
- If you have a health plan through a job, you can use a Flexible Spending Account (FSA) to pay for copayments, deductibles, some drugs, and some other health care costs that are not covered by any other insurance.
- You don’t pay income taxes on this money, so using an FSA can reduce your taxes.
- The limit to the pre-tax amount an employee can withhold is $2,600. The limit is per employee, so a family with two working spouses can each choose to contribute up to $2,600 to their FSA.
- The FSA coverage is limited to expenses incurred in the current year; the funds do not roll over into next year. Unless employers elect to allow a portion of the unused FSA contributions to roll over to the following year, FSA's operate as a "use it or lose it" plan.
Health Savings Accounts (HSAs):
- Eligibility for an HSA is limited to people who have a high deductible health plan or HDHP. Both employees and self-employed individuals are eligible.
- HSAs are tax-advantaged, meaning that you can direct funds from your paycheck into an HSA pretax, or you can add the money post-tax and deduct taxes later. An employer may also contribute to your HSA.
- Any unused funds can be rolled over each year and will function as a savings account.
- HSA money earns interest, can be invested in stocks or mutual funds, and spent on any qualifying medical expense, as defined by the IRS. The account is yours. You can contribute to one as long as you have an active qualifying high-deductible plan and no other health coverage.
Both accounts can help you manage your out-of-pocket medical expenses throughout the year. There are critical differences between HSAs and FSAs that will determine the tax advantage you can receive from each. Since it literally pays to get this decision right, consult your financial advisor for advice before you make the decision.
Get complete information on FSAs and HSAs from the IRS.
Charles P Myrick CPA offers tax preparation for individuals using a process that combines smart, personalized planning with annual tax preparation and filing. We work closely with tax lawyers, and investment advisors to ensure that all the details are legally sound, technically accurate, and working to your maximum benefit. Contact us to learn more: (202) 789-8898