HSAs and FSAs and Healthcare Costs – Oh My!


Open enrollment season is on the horizon. Do you know where your benefits are?

For 2014, healthcare premiums are expected to increase by about 5% according to the 15th annual Employer Health Benefits Survey by the Kaiser Family Foundation and the Health Research & Educational Trust . Total average annual cost for families will be at $16,351 (with workers paying $4,565 in premiums) and $5,884 for individuals (with workers paying $999). As the first open enrollment season post Obamacare – it’s important to pay attention to your options and understand some of the benefits available to you – including the Health Savings Account (HSA) and Flexible Spending Account (FSA).

Meet the Health Savings Account (HSA)

The HSA is a tax-advantaged medical savings account established by an individual or family who is enrolled in a high-deductible health plan to pay for qualified medical expenses. Contributions are 100% federal income tax deductible and may be withdrawn tax and penalty free for reimbursement of qualified medical expenses such as co-payments, prescription drugs, and deductibles. There is no requirement to spend the account balance in a given year, so if the funds aren’t used, they’ll be able to grow tax-deferred for use in later years.

For 2013 you can make pre-tax contributions of $3,250 for individual coverage and $6,450 for family coverage. In 2014 those amounts will increase to $3,300 and $6,500 respectively.

Remember – as long as the account is established and you’re keeping track of the medical costs you incur, you can take a withdrawal for reimbursement at any time. In addition, HSA withdrawals that aren’t used for qualified medical expenses are treated similarly to IRA withdrawals. You’ll be taxed on the distribution at ordinary rates and will incur a 20% penalty for withdrawals before age 65.

Meet the Flexible Spending Account (FSA):

Similar to an HSA, the Health FSA allows for pre-tax contributions to an account that is established to pay for qualified medical expenses. However, the FSA has what is known as the “use it or lose it” requirement, which provides that any unused amount remaining in the account at the end of the year will be forfeited. This could leave you scrambling at yearend to schedule dental or vision exams in order to take advantage of your contribution.

For 2013 you can make pre-tax contributions of $2,500 per employee for Health FSA’s (meaning if you’re married and you and your spouse each have your own FSA, you can contribution $2,500 each to your own plan). You do not have to be covered under any other health care plan to participate.

An important note about Health FSAs is that a participating employee’s entire annual contribution is available for use towards qualifying events at the start of the plan year (or after the first contribution is made). This means that even if you elected to contribute $2,500 in equal installments throughout the year, the full $2,500 would be available from that initial contribution period forward to pay for qualifying expenses– even if you haven’t fully funded.

When establishing either of these accounts, it’s important to some pre-planning and anticipate what your medical expenses might be in any given year. For example, with an FSA – if the birth of a child or a surgery is on the horizon, it might be time to increase your contributions.

As you go into open enrollment season remember that the FSA will provide you with a tax-advantaged double threat of tax-deductible contributions and  tax-free distributions for qualified medical expenses. The HSA goes one step further and also provides tax-free interest and dividend accumulation – making in a tax-advantaged triple-threat.

Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

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