Savings Plans for Medical Expenses
With open enrollment season, it’s time to go over your workplace benefits.
Specifically, we need to have a discussion about two workplace accounts you may or may not be using - the HSA and the FSA. These two accounts are incredible tools to grow your wealth and save money on both medical expenses and taxes. But how do these two accounts differ? And when should you use which?
A Health Savings Account (HSA) is a tax-advantaged account specifically for medical expenses. It’s specifically intended for people who have HDHP (High Deductible Health Plan) insurance coverage. If you don’t have HDHP coverage, you aren’t eligible for a HSA. Your HSA is often set up through your workplace, but it’s not owned by your employer. Instead, you own the account, and can be taken with you even if you leave for another employer.
In 2019, the new contribution limits for your HSA are:
Employer + Employee: $3,500 (self only) or $7,000 (family)
Catch up Contributions (age 55+): $1,000
These contribution limits are annual, and they roll over from year to year. For this reason, the HSA can be an excellent tool for retirement savings. Funds contributed to your HSA are pre-tax. They can only be used for qualified medical expenses. The tax penalty for using your HSA for non-qualified medical expenses, is 20%. So, be careful that you don’t accidentally use your HSA card for take out when you’re in a rush!
A Flexible Spending Account (FSA) is similar to a HSA, but it can be opened by anyone - not just those enrolled in a HDHP insurance plan. However, it’s owned by your employer, not the employee. So, if you leave your employer, you don’t necessarily get to take the money with you. FSA contribution limits for 2018 are:
$2,650 for an individual (medical)
$5,000 (for married couples filing jointly, dependent care)
Contribution limits for 2019 haven’t been released yet.
Although the FSA is also funded with pre-tax dollars, it’s important to keep in mind that you can’t roll the funds over year to year. Sometimes, employers will let you carry over a small amount for the first few months of the new year, but other times they won’t. When you start contributing to your FSA, it’s important to keep this in mind. You’ll need to spend down what’s in the account by the end of each year and you can only use the funds for qualifying medical expenses.
Wait - What’s The Difference?
The biggest two differences between the HSA and the FSA are:
Your HSA can be rolled over into future years, your FSA can’t be.
Your HSA is owned by you, and your FSA is likely owned by your employer.
If you’re able to, an HSA is likely a wise savings choice if you have an HDHP insurance plan. However, if HDHP coverage isn’t enough for you, you may want to go the FSA route. Just be careful that you’re only saving what you’ll spend in a given year to avoid losing it if you can’t spend it down quickly enough!
Different Types of FSAs
There are two different types of Flexible Spending Accounts - one that’s used for medical expenses, and one that’s used for dependent care. This means, depending on the type of account you open, you might be able to set aside funds for either qualifying medical expenses or the costs associated with having kids or adult dependents who require care. You can even open both if you’re in need of them! Dependent care FSAs are a fantastic way to save for daycare and childcare costs in a tax-efficient way. When you contribute to these accounts, you’re lowering your taxable income, and you’re able to put money aside that’s earmarked for specific expenses in your budget - it’s a win-win!
Don’t Miss Open Enrollment!
Don’t miss open enrollment this season! For many organizations, November is your time to make any changes to your benefits - and you won’t get the opportunity again until next year! This season, you should be looking at:
Your retirement accounts
Your workplace provided life insurance
Other benefits with an annual enrollment (think: cybersecurity insurance, etc.)
It’s also worthwhile to use this time to review any other benefits you may have available to you! For example, some organizations have adoption assistance programs available, or financial wellness coaching for employees. You never know what you’re missing out on if you don’t take a second look, or contact HR!
If you have questions about your benefits, reach out! I’d love to help you talk through them.