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HSAs and FSAs

Health insurance plans, tax code and government-sponsored programs are often written in complicated language, making it a challenge to understand all of the benefit options available to you. Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs) are similar tax-saving ways to help pay for qualified medical expenses.  However, each comes with its own set of rules.

A health savings account (HSA), is a tax-advantaged account set up through a qualified trustee (bank, insurance company, etc.) to pay or reimburse qualified out of pocket medical expenses. Simple sounding, HSAs have some specific requirements starting with who is eligible to sign up for a HSA.

To qualify for an HSA, you must:

• Be covered under a qualified high-deductible health plan (HDHP).

A HDHP has a minimum annual deductible higher than a typical health insurance plan.

For 2017, the minimum annual deductible is $1,300 for individuals and $2,600 for families with a maximum cap of $6,550 and $13,100 for individual and family out of pocket medical expenses respectively.

For 2018, the minimum annual deductible increases to $1,350 for individuals and $2,700 for families. The caps on annual out of pocket medical expenses increase to $6,650 for individuals and $13,300 for families.

• Not have any other healthcare coverage unless already covered by liabilities incurred under workers’ compensation laws, torts (civil legal liability), or ownership or use of property, a specific disease, or a fixed amount per day (or period) of hospitalization

• Not be enrolled in Medicare

• Not claimed as a dependent on someone else’s current tax return

Benefits of opening an HSA account include the following:

• Contributions made by anyone other than an individual’s employer are tax deductible and do not need to be itemized on Tax Form 1040.

• Contributions made on the behalf of an individual’s employer may be excluded from an individual’s gross income.

• The HSA balance rolls over from year to year.

• The interest and gains on the assets in the account are tax-free, and distributions remain tax-free if paying for qualified medical expenses. At age 65, distributions may be taken for any reason without penalty.

• HSA funds remain available for future qualified medical expenses even if the individual changes health insurance plans, changes employers, or retires.

Individuals with a qualified high deductible health plan are eligible to contribute up to $3,400 a year in 2017, compared to family HDHP coverage which allows for up to $6,750 in annual contributions. In 2018, those amounts increase to $3,450 and $6,900 respectively. Individuals who are 55 or older are eligible to contribute an additional $1,000 each tax year. Employers have the opportunity to contribute to HSAs, but the annual limits still apply and include amounts contributed through a cafeteria plan.

Qualified expenses to use funds from an HSA include medical, dental, vision, and prescription expenses not covered by medical insurance. These do not include insurance premiums except in certain cases including paying for COBRA and paying for medical premiums if unemployed.

In comparison, some individuals may have the option to enroll in a Flexible Spending Arrangement (FSA). FSAs have many similarities to HSAs in their structure and use of funds, but have many differences that are important to understand.

A health Flexible Spending Arrangement (FSA) is a tax-favored program that allows employees to pay for out of pocket medical expenses with pre-tax dollars. In order to qualify for an FSA one must be employed by an employer who offers the FSA program as part of its cafeteria plan coverage

Once enrolled in a FSA, the employee must choose an amount of their salary to pledge to the account by estimating how much he or she thinks will be spent during the period on copayments, drugs and other qualified expenses not covered by insurance. Each pay period, an equal proportion of this contribution will be taken out of an individual’s income pre-tax.

Benefits of enrolling in a FSA include the following:

• Because contributions to the account are made through a cafeteria plan, they are not subject to income and other payroll taxes, such as Social Security and Medicare.

• The employer may allow the annual contribution amount to be available at the beginning of the plan year, which would allow an employee to claim the entire annual amount at the beginning of the year if he or she has qualifying expenses.

In 2017, employees are eligible to deposit up to $2,600 in an account each year, subject to the employer’s plan limitation. The contribution limit is expected to remain the same for 2018.

FSAs are “Use it or lose it”: Any money left in an FSA at the end of the plan period is forgone by the owner of the account.  Some plans have a grace period after the year is over to deplete the remaining balance of the FSA.

For more information about HSAs and FSAs plus a list of qualifying medical expenses, contact your accountant, plan administrator or go to IRS Publication 969.