It’s no secret that healthcare can become very expensive. According to a Gallup healthcare study, in 2018 Americans borrowed an estimated $88 billion to cover healthcare expenses. On top of that, one in four people skipped medical treatment because of the cost. As an employee, it’s always a good idea to look into programs that encourage saving for medical expenses not covered by insurance.
A health savings account (HSA) and a flexible spending account (FSA) are both tax-advantaged accounts that allow you to save specifically for medical costs. Both plans have key differences and traits that you should consider when deciding what works best for you.
What is an HSA?
An HSA can be looked at as a type of personal savings account, but it’s used for qualified healthcare expenses. In order to be eligible to make contributions, you must be enrolled in a High Deductible Health Plan (HDHP) which is a health insurance plan often with lower premium costs and a high minimum deductible for medical expenses.
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To qualify for an HSA, you must only be enrolled in a HDHP. You also cannot be enrolled in Medicare.
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If you’re considering opening an HSA that is funded after tax, you can deduct the year’s contributions from your taxes when you file. If your employer offers an HSA, you’d likely fund it pretax from your paycheck. HSA funds that are not utilized by the end of the year roll over to the following year and do not expire.
The contributions that you or your employer make into the account are limited to a maximum amount each year. For 2019, the HSA max is $3,500 for an individual and $7,000 for a family — for 2020 the limits have increased to $3,550 and $7,100 respectively. The contributions are invested over time and can be used to pay for qualified healthcare expenses, which include the cost of many services or devices meant to alleviate or prevent physical or mental illness.
Not all plans with high deductibles qualify for HSAs, so it’s important to check with the insurer that the plan you’re interested in is “HSA-eligible.”
What is an FSA?
A flexible spending account is a type of savings account that provides the account holder with specific tax advantages. An FSA is set up by an employer for an employee. The account allows you to contribute a portion of your regular earnings to pay for qualified expenses related to healthcare costs. Flexible spending accounts come only as part of a benefits package from an employer, so it’s important to remember that you can’t get one on your own.
The medical expenses you can use the funds for are generally the same as HSAs. But the key difference with an FSA is the “use or lose it” rule. If you do not use all of the funds in your FSA by the end of the year, you lose that money. Some employers offer a rollover option, which allows remaining funds to be rolled over to the following year however, the IRS limits the rollover amount to $500. If you do find yourself with funds remaining at the end of the year, you can spend them at the FSA Store so that your savings don’t go to waste.
To dive deeper into the differences between HSAs and FSAs, check out this blog post.
How to Budget for Your Expenses
The amount of money you’d want to save can be unpredictable, but it’s good to just take a look at where you are in life. What are you expecting in the year to come? Are you thinking about having a kid or do you have a surgery coming up? These are all things to consider when thinking about budgeting for a medical savings plan. Check your plan documents and make your best estimate of what you’ll need for the year.
A simple rule of thumb you could use would be to begin contributing enough for your deductible, expected medication costs, and anticipated doctor’s visits.
Both an HSA and FSA have benefits that make managing your out-of-pocket medical expenses easier throughout the year. Discovering what works for you depends on your personal preferences and what you’re willing to contribute, but each type of account has characteristics that’ll help you navigate your yearly healthcare expenses better.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.