The Health Savings Account and the Flexible Spending Account

The Health Savings Account and the Flexible Spending Account (officially named Flexible Spending Arrangements by the Internal Revenue Service) are plans envisioned by the federal government to help consumers save for medical expenses. 

These accounts with tax advantages allow contributors to accumulate funds for specified health-related outlays. Similarities and differences between the HSA and the FSA exist.

Who Qualifies for the HSA?

People who are 65 years of age or younger with a high-deductible health plan are eligible for the HSA. 

The maximum deductible for 2020 is $6,900 for a single person and $13,800 for a family, and the minimums are $1,400 and $2,800, respectively.

The 2020 maximum contribution to the Health Savings Account is $3,550 for a single person and $7,100 for a family.

These amounts are subject to change, so consult Internal Revenue Service Publication 969 (“Health Savings Accounts and Other Tax-Favored Health Plans”), a health plan advisor or a tax consultant.

Self-employed people and unemployed people can own the HSA. 

However, once accountholders begin receiving Medicare, they cannot make further contributions.

Who Qualifies for the FSA?

People who are 65 years or younger may have this plan, but once they begin receiving Medicare, they can no longer contribute to the Flexible Spending Account. 

Although the signee doesn’t need to have health insurance, they probably should have it.

Who Contributes to These Plans?

The employee or the employer may contribute to the Health Savings Account. 

Self-employed people and unemployed people or a third party acting on their behalf may also contribute. 

As for the FSA, the employee elects to have regular payroll deductions made from the gross paycheck. 

Employers may contribute to the Flexible Spending Account.

Who Owns the HSA or the FSA?

Since the employee owns the Health Savings Account, when workers change jobs, it is still theirs.

With the Flexible Spending Account, employees who take new employment elsewhere forfeit the account.

What Are the Tax Advantages of the HSA?

When employees make contributions to either account, they are using pre-tax dollars. 

The employee or another person who contributes to the Health Savings Account can take an income tax deduction. 

If the employer makes the contributions, that income is excluded from the employee’s gross income.

The HSA offers investment opportunities too. For the employee, money invested earns tax-free interest or earnings. 

Depending on the plan, this money can be placed in annuities, bank accounts, CDs, stocks, bonds, or mutual funds. 

The money is tax-free upon withdrawal if employees use it to pay for qualified expenses.

Employees who withdraw funds before age 65 for non-medical expenses must pay the penalty and income taxes. 

After age 65, account holders can withdraw money for non-medical expenses without a penalty, although they will still have to pay taxes. 

The HSA has no minimum distribution requirement.

What Are the Tax Advantages of the FSA?

As for the FSA, employment and federal income taxes are not deducted from the part of the salary used to fund the contributions. 

If the employer makes the contributions, then the money is excluded from the employee’s gross income. 

Federal income Tax Returns do not require reporting of Flexible Spending Accounts.

The employee’s income includes contributions paid by the employer for long-term care. 

Two Types of FSA‘S

The FSA reimburses employees for the qualified expenses they have paid.

Once workers submit the proper receipts and evidence for their out-of-pocket expenses under the terms of the plan, they are repaid. 

You’ll learn about Two types of Flexible Spending Accounts: The Healthcare FSA and the Dependent Care FSA.

What Expenses May the Healthcare FSA Be Used For?

Employees are reimbursed for qualified expenses as defined by their specific plan. 

Covered outlays may include, but are not be limited to, select prescription medications, over-the-counter medications such as aspirin and ibuprofen, laxatives and stool softeners, infertility treatments, midwives, psychiatric care, addiction treatments (for drugs or alcohol) ambulance services, and a great deal more.

What Are the Reimbursable expenses Covered by the Dependent Flexible Spending Account?

Some of the covered expenses under the Dependent FSA may include private childcare providers, au pairs, nursery care, preschool, daycare, and day camp (of the non-educational variety) until their dependent reaches the age of 13 years. 

For dependent-care claims, accountholders must report the social security number of their childcare provider.

Reimbursements for daycare or in-home care that are custodial and not medically necessary can be taken by employees who claim a senior citizen as a dependent on their tax return.

The Dependent FSA also allows for expenses for the employee’s spouse to look for work or to go to school.

The best advice is for employees to contact their job’s human resources office because reimbursement is account-specific. 

In general, workers who pay for qualified medical expenses do not have to pay income taxes on the repayments they receive.

What Needs May the HSA Be Used For?

Many of the reimbursable expenses for the HSA are the same as for the Healthcare FSA. The HSA allowable expenses number in the dozens.

They include but are not limited to, fertility treatments, hospital stays, dentures, insulin, and supplies for people with diabetes, orthodontics other than for cosmetic reasons, programs for smoking cessation, and sunscreen.

Does Money in the HSA and the FSA Roll Over?

As for rollovers, they are allowed for the HSA, but typically not for the FSA. 

However, some Flexible Spending Accounts allow up to $500 to be used in the next year of the plan. 

The IRS gives plans the option to grant a two and a half month grace period for balances so they can be taken into the next year.

Final Words

The Health Savings Account and the Flexible Spending Account give accountholders tax advantages while their contributions help them to pay for their own or their dependent’s qualified health-related or care-related expenses. 

Before signing up, however, it’s suggested that employees learn what the plan covers. Some people who are thinking about enrolling will benefit from speaking to a tax planner.