Updated: May 26, 2020
Happy Friday all! Closing out another week in shelter-in-place here in Boston. I'm sure many of you are in the same boat. As health continues to be a top-of-mind priority, I figured it would be wise to talk about ways to make decisions that can benefit your physical and financial health. Two ways to plan for health emergencies or generally expected health costs are Health Savings Accounts and Flexible Spending Accounts.
Health Savings Accounts, commonly referred to as HSAs, are savings accounts designated for pre-tax contributions of funds that will be used for future health-related costs. The benefits of this type of savings account is that you can contribute to it throughout the year, and then draw any amount you need to cover medical expenses. HSAs typically cover co-payments, deductibles, coinsurance, prescriptions, glasses and other medical supplies, as well as hospital bills. Once that money is in your HSA, you never have to worry about budgeting in a monthly expense for a doctor's appointment or prescription, and if a health-related emergency happens, you have some funds to contribute to it. For the year 2020, you can contribute up to $3,500 for self-only coverage and up to $7,000 for a family. Funds contributed to an HSA roll over every year, and can earn tax-free interest.
While HSAs are beneficial, there are some eligibility requirements. The major requirement is that you have to be enrolled in a High Deductible Health Plan (HDHP) either through your employer or self-purchased. Once this requirement is met, you can create an HSA either through your employer (if they offer it) or through a banking institution, such as HSA Bank. (This is not an endorsement for that bank; do your research to determine where best to open an HSA account). There are also restrictions on what you can spend your HSA money on. Recently, due to the Corona Virus, that list has expanded to include certain over-the-counter medications, like aspirin or other pain killers, and for the first time ever it can now cover menstrual products (Yay ladies!!). Check out a fuller list of what you can and cannot use HSA funds for here.
Funds withdrawn and used for qualified medical expenses are tax free; however, if you withdraw HSA funds for any other purpose, and you are under the age of 65, they are subject to your income tax rate, in addition to a penalty percentage. After the age of 65, HSAs can be used like a traditional IRA (subject to tax) if you want to withdraw funds not related to medical expenses. If you continue to use them for medical expenses after 65, the funds remain tax-free.
Flexible Spending Accounts/Arrangements, commonly referred to as FSAs, serve largely the same purpose as the HSA in that the funds are tax-free and are used to pay for medical costs. There are some key differences though. You are eligible for an FSA if you have health insurance from your employer; different from HSA where you can purchase your HDHP coverage yourself and still open an HSA. Also FSA funds must be used within the year you contribute them. If you don't, you can lose that money. Your employer can offer two grace options to forestall you losing the money: allowing you to carry over $500 into the next year; or giving you 2 1/2 months more to spend the money. However, employers are not required to offer either grace option. Another key difference is that your employer can choose to contribute money to your FSA, in addition to your contributions. 2020 contribution limits are $2,650 per employer. If you and your spouse are employed and receive health coverage from two different employers, you can both contribute the 2020 limit.
HSAs and FSAs can be useful for planning in advance for expected or unexpected medical costs, and using your pre-tax money to the best of its ability. For the FSA, just make sure you are wise with how much you contribute so that you use it within the year without losing your funds. Reach out to your benefits person if you aren't sure whether or not they offer HSAs or FSAs. Once you have that information, determine which of these options might better suit your needs. Stay healthy out there folks!