As you’re reviewing your options for making changes to your benefits during your employer’s open enrollment period, consider the differences between a health savings account (HSA) and a health care flexible spending account (FSA).
An FSA is generally established under an employer’s cafeteria plan. You can set aside a portion of your salary on a pre-tax basis to pay out-of-pocket medical expenses. An HSA is a combination of a high-deductible health plan and a savings account in which you save pre-tax dollars to pay medical expenses not covered by the insurance. “High-deductible” means you pay more of your medical costs out of pocket. Generally, premiums on high-deductible plans are lower than traditional health insurance policies. To qualify as a high-deductible plan for 2016, the minimum deductible must be $1,300 for self-only coverage and $2,600 for family coverage.
For 2016, you can contribute up to a maximum of $2,550 to an FSA. Typically, you have to use the funds by the end of the year. Why? Unused amounts are forfeited under what’s commonly called the “use it or lose it” rule. However, your employer can adopt one of two exceptions to the rule, and offer either a two-and-a-half month carryover period during which you can use the remaining funds, or allow you to carry over up to $500 into the following year.
If you are single, the 2016 HSA contribution limit is $3,350 ($6,750 for a family). You can add a catch-up contribution of $1,000 if you are over age 55. You do not have to spend all the money you contribute to your HSA each year. You can leave the funds in the account and let the earnings grow.
FSAs are typically not considered actual “accounts” because your employer holds your money until you request reimbursement for qualified expenses. HSAs are savings accounts, and the money in the account can be invested. Earnings held in the account are not included in your income.
Distributions from both accounts are tax and penalty-free as long as you use the funds for qualified medical expenses. After age 65, the funds in your HSA can be used for any purpose without penalty.
Normally, your FSA stays with your employer when you change jobs. Your HSA belongs to you, and you can take the account funds with you from job to job. That’s true even if your employer makes contributions to your HSA for you. Because you generally can’t contribute to both accounts in the same year, understanding the differences can help you make a decision that best fits your circumstances.
Contact us for help as you consider your benefit plan options.