In 2015 the average American spent $9,990 on healthcare. Compare that figure to $146 ($1164.55 with inflation calculated) in 19601 and it’s evident that healthcare costs have increased appreciably. Fortunately, there are pre-tax programs you can utilize to help lessen the burden of healthcare expenses.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) is an employer-sponsored account you can use to pay for eligible out-of-pocket healthcare costs. The amount of money you elect to put into this account is determined at the beginning of the enrollment period, and the lump sum is put on a debit card for your usage. A portion of the amount you elected to put into your FSA is taken out of your paycheck, pre-tax, each pay period, thus helping to lower your current taxable income. Some companies may contribute an amount as well.
Use this debit card at the doctor’s office, hospital, pharmacy or any place where FSA-eligible materials are sold. Eligible expenses include office co-pays, sunscreen, wheelchairs, and eyeglasses. While FSAs cover many out-of-pocket medical expenses, not all expenses are covered by the plans so it’s important to confirm the eligibility of materials and expenses you may incur prior to budgeting for your FSA.
While being able to pay for medical supplies and services with pre-taxed funds may sound advantageous, many people may not benefit from an FSA.2 It is important to estimate how much money you may spend on out of pocket healthcare expenses because depending on the amount you spend, not only will an FSA not be advantageous, it may even be detrimental.
If you elected to contribute more than you used, some plans may allow you to roll over up to $500 from the previous plan year for use in the next year. In the event that you elected to contribute significantly more than you actually used, the $500 eligible roll over may be less than the amount you have left in your account. Unfortunately, this additional money would likely have to be forfeited, thereby negating any tax savings. For 2018, participants may contribute up to $2,650, and these limits can vary from year to year.3
Once you’ve chosen the amount you wish to contribute for the plan year, it cannot be changed even if your health situation changes during the year. If you did not allot enough, you will have to wait until the next enrollment period to increase your contribution.
Health Savings Account (HSA)
Another option that allows you to pay for medical expenses on a pre-tax basis is the Health Savings Account (HSA). You may qualify for an HSA if you are enrolled in a high-deductible health insurance plan or are self-employed.4 High-deductible insurance plans are different from traditional insurance plans in that they do not pay for healthcare costs until a deductible is met. You cannot have an FSA and be actively contributing to an HSA in the same year.
As with an FSA, an HSA deducts a determined amount of money from your pay check pre-tax and places it into an account you can use for approved expenses. Items and services that are eligible for the HSA are similar to those for the FSA.
Unlike the FSA, HSA funds are yours and are not tied to an employer, although your employer may elect to make additional contributions to your account. While there are yearly contribution limits, the HSA balance does not expire. You can carry the account to another job and into retirement. Because the money in the HSA is pre-tax, many choose to maximize the contribution amount and reserve the funds for their retirement years.
HSA contribution limits for 2018 are $3,450 for a single person, and $6,900 for a family, and, like the FSA, these limits may vary from year to year.5
We believe FSA and HSA accounts are both excellent ways to help pay for healthcare costs in a tax advantaged way. Depending on which you may qualify for, one of these accounts could help to lower your taxable income. Ask us or your employer benefits coordinator if you or your family could benefit from a FSA or HSA.
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