Healthcare costs continue to rise.
In fact, in 2020 the average annual premium for employer-based family coverage reached $21,342, up 4% from last year, with workers on average paying $5,588 toward the cost of their coverage, according to data from KFF (Kaiser Family Foundation). One way to save money on healthcare costs is through a Health Savings Account (HSA) or Flexible Spending Account (FSA). Both accounts offer tax advantages, yet most people don’t understand their benefits or how they work. To help you figure out if an HSA or FSA is a healthy choice for your personal savings, here’s what you need to know.
An HSA allows you to set aside pre-tax dollars in an interest-bearing account to cover future medical expenses, as long as you’re enrolled in a high-deductible health plan (HDHP). You can deduct your contributions, and your earnings or interest will grow tax-deferred. Your distributions will be tax-free when they are used for qualified medical expenses, which include doctor visits and hospital stays as well as eyeglasses, contacts, chiropractic care, prescription drugs and other qualified medical expenses.
Another advantage of the HSA is that you can keep your account even if you switch jobs. The funds in your HSA are always yours to keep, regardless of your employment status or insurance coverage. Plus, the money you put into your HSA rolls over annually, meaning you always have it available. This can be especially beneficial if you’re relatively young and healthy, as you can start saving up money for medical costs later in life. You can open an HSA either through your employer or on your own with First American Bank by applying online or stopping by any of our Illinois, Wisconsin or Florida branch locations.
An HDHP is a medical plan that offers lower-cost premiums and higher deductibles in comparison to traditional health care coverage. The monthly premium is usually lower, but you pay more health care costs yourself before the insurance company starts to pay its share. An HDHP is designed to work in conjunction with an HSA. If an HDHP seems like the right option for you, it’s important to set aside the money you would have paid toward your premium to fund your HSA. For example, instead of paying the insurance company $400 each pay period, you pay $250 per pay period and put $150 into your HSA each week. Then, you can use your HSA funds to cover your medical appointments, prescriptions and other qualified expenses when they arise.
An HSA has various eligibility requirements, including:
- You must be covered under an HDHP on the first day of the month.
- You have no other health coverage (certain exceptions apply).
- You cannot be enrolled in Medicare.
- You cannot be claimed as a dependent on someone else’s tax return.
Contributions to an FSA also come from your gross pay as pre-tax money, just like an HSA, and your withdrawals likely won’t be taxed if used for qualifying medical expenses. Child care expenses qualify, too, so you might be able to enjoy some additional tax benefits by using an FSA to pay for daycare, depending on what your accountant tells you.
One of the main differences with the FSA is that you must declare how much of your paycheck you want your employer to deduct and place into your account each pay period. And, you must spend all your declared funds within that tax year; otherwise, the unused money will be lost in most cases, unless your employer has set up a grace period or carryover option. That’s why it’s important to have a sense for how much you’re going to spend on child care and what you’ll need for medical expenses throughout the year.
Additionally, there are contribution limits that the IRS sets each year. Check with your employer to find out your maximum allowable contribution. In 2020, the maximum amount one person can save in their FSA is $2,750 according to the IRS. If you are married filing jointly, confirm with the IRS to see the amount you can save.
There are a few different types of FSAs including Health FSAs, Limited Health FSAs and Dependent Care FSAs. The only common eligibility requirement is that you can’t be self-employed. If you are self-employed, explore a Medical Savings Account (MSA). Unlike an HSA, you can only open an FSA through your employer, provided they offer one. However, you don’t need to be enrolled in an HDHP, as you do an HSA. For full eligibility details and questions, check with the IRS, your tax professional or HR representative.
As healthcare costs continue to rise, using an HSA or FSA can offer relief. To see how much you could save on medical expenses, try using our Health Savings Account Savings Calculator or Health Savings Account Contribution Calculator. Take a look at your financial situation and then talk to one of our Health Account Services representatives to determine if an HSA or FSA can serve you and your family’s healthcare needs and savings goals. Once you open your HSA, be sure to take advantage of our online HSA tools, so you can better manage your account.