Healthcare costs can be expensive, even for the healthiest people. Even if you have health care insurance, you may want to take advantage of other options for saving for medical expenses not covered by insurance. Outlined below are some of the differences between the two most common accounts offered to individuals and families, health savings accounts (HSA) and flex spending accounts (FSA).
HEALTH SAVINGS ACCOUNT (HSA)
A health savings account is a tax-advantaged account that is paired with a high-deductible health plan. If someone has relatively low health expenses, they may choose a high-deductible health plan to save on premium costs.
Contributions to a health savings account are made pre-tax via payroll deduction or from after-tax dollars. In both scenarios, you are eligible to receive a deduction on your tax return for your current year contributions to the plan. Health savings accounts are subject to maximum contribution limits. In 2024 an individual can contribute up to $4,150 and a family can contribute up to $8,300. If you are over 55, you can contribute an additional $1,000 as a catch-up contribution to your Health savings account.
The primary advantage of an HSA is the ability to keep the balance in this account whether you use the funds or not. You can build a balance in the account over time, and some plans even allow you to invest the money within the account which can generate further growth.
Money withdrawn from an HSA is tax-free when used for qualified medical expenses. Qualified health savings account expenses include prescription drugs, eyeglasses, deductibles, and co-payments. For a full list of qualified health expenses, check with your plan provider. If you withdraw money from an HSA for a non-qualified medical expense, you will have to include the withdrawal as taxable income for the year, and you may be subject to a 20% penalty if you are under the age of 65.
FLEX SPENDING ACCOUNT (FSA)
A flex spending account is another way for employees to set aside pre-tax dollars via payroll deduction for health-related expenses. A health flex spending account is paired with various health insurance plans and allows employees to set aside dollars for that calendar year.
A set amount is withheld from the employee’s paycheck each period as a contribution to their flex spending account. When employees incur qualified expenses, they must then submit an expense report in order to receive reimbursement from the plan. Flex spending accounts are subject to maximum contribution limits in 2024 of $3,200 for an individual or family.
One of the primary differences between a health savings account and a flex spending account is whether or not you have the ability to roll your funds forward each year. In a flex spending account, whatever funds remain in your account at year end are forfeited or lost, often referred to as the “use it or lose it” provision.
Like with a health savings account, qualified flex spending account expenses include prescription drugs, eyeglasses, deductibles, and co-payments. For a full list of qualified medical expenses, check with your plan provider. Also similar to a health savings account, if you are using funds to pay for qualified medical expenses, you will likely not owe taxes on withdrawals.
It is important to note that you cannot contribute to an HSA and have a general-purpose health FSA in the same year. It is OK to contribute to an HSA and have a limited-purpose FSA (used to pay for eligible dental or vision expenses) or a dependent care FSA (used to pay for eligible dependent care services such as preschool, summer day camp, before/after school programs, and child or elder care).
Please contact your JNBA Advisory Team this fall during your open enrollment period if you have questions about what plan would be best for you or your family.
JNBA is not an accountant and no portion of the above should be construed as accounting advice. All accounting issues should be addressed with an accounting professional of your choosing.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.
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