Unlocking Healthcare Savings: HSA & FSA Benefits

Healthcare costs often leave a sizable dent in your finances. The Health Savings Account and Flexible Spending Account are accounts that can help with medical costs and reduce taxes. They are useful for managing both healthcare expenses and tax burdens.

What is a Health Savings Account (HSA)?

An HSA, designed for covering various medical expenses, is exclusively accessible to individuals enrolled in high-deductible health insurance plans. Money put into an HSA can be deducted from taxes, and any money made in the account is not taxed. Withdrawals used for qualifying medical costs are also tax-free.

The most you can contribute to your HSA depends on inflation rates and the details of your high-deductible insurance.

2023 Contribution Limits

For the year 2023, individuals enrolled in an eligible individual high-deductible health plan can allocate a maximum of $3,850 towards their HSA. Families, on the other hand, have a contribution limit set at $7,750.

In 2023, health plans with high deductibles must meet certain IRS rules. The rules say that the plans need a minimum yearly deductible of $1,500 for individuals and $3,000 for families.

Meeting these requirements is necessary for the plans to be considered eligible. Additionally, out-of-pocket expenses should not surpass $7,500 for self coverage and $15,000 for family coverage.

2024 Contribution Limits

In response to significant inflation, the IRS is boosting the HSA contribution limits notably for the 2024 period. For the upcoming year, individuals will be able to contribute up to $4,150, marking a $300 increase from 2023. Families, on the other hand, will see their contribution limit rise to $8,300, reflecting a $550 increase compared to 2023.

The IRS has set minimum annual deductibles for health plans with high deductibles. For the 2024 tax year, the minimum deductible for individuals is $1,600 and for families is $3,200. Additionally, the ceiling for out-of-pocket expenses should not exceed $8,050 for individuals or $16,100 for families.

What is a Flexible Spending Account (FSA)?

A health FSA is a company account used to pay for medical expenses. These expenses include copays, prescriptions, and items needed to meet your insurance deductible. You put money in this account from your salary, and in return, the IRS doesn't tax that part of your income.

It's worth noting that some employers provide dependent care flexible spending accounts (DCFSAs), distinct from health FSAs. DCFSAs serve to assist with expenses related to daycare, preschool, and elder care.

FSA Contribution Limits for 2023 and 2024

The IRS sets the yearly maximum FSA contribution limit, adjusting it for inflation. For 2023, the limit stands at $3,050, approximately $254 per month. In 2024, the FSA contribution limit increases to $3,200, roughly $266 per month.

How do HSA and FSA Contributions Work?

HSA Contributions

If your employer provides a health savings account tied to a high-deductible health plan, they might facilitate tax-free contributions through payroll deductions directly into your HSA.

Contributing to an HSA can make you eligible for a tax deduction. This applies even if you don't itemize deductions. To lower your taxes at the last minute, you can contribute money to an HSA for the previous tax year. This can be done until April 15, 2024.

FSA Contributions

When you start an FSA at work, money is taken from your paycheck and put into the account. The positive aspect is that these contributions are made before taxes. This can lower your payroll taxes and make your tax burden easier.

How to access money in HSA or FSA?

An FSA usually works with a debit card or a reimbursement process. You pay first and then give receipts to the FSA for repayment. Using a debit card is easier, but you might still need to show proof of eligible medical expenses.

In the case of an HSA, you'll typically receive a debit card connected to your HSA account. Additionally, your HSA manager will provide a Form 1099-SA, among other annual tax documents, detailing distributions from the account. Keeping receipts and records of your expenses is advisable in case the IRS seeks clarification regarding your tax deductions.

What if I don't use all the money?

Health Savings Account

HSAs grant you control over your funds without any withdrawal deadlines, even if your high-deductible health plan changes. You can invest your HSA money in mutual funds or other securities. This lets your money grow without taxes and you can use it for medical expenses whenever you need to.

However, it's crucial to prioritize medical expenses when tapping into your HSA funds. Using the money for non-medical purposes before you reach 65 could result in it being considered taxable income. In addition, you may be required to pay an additional 20% tax for non-medical use.

At the age of 65, you are allowed to use HSA funds for any purpose. However, if you choose to use these funds for non-medical expenses, you will be required to pay taxes.

Flexible Savings Account

Flexible spending accounts (FSAs) come with a notable downside—they operate on a use-it-or-lose-it basis. Should you find yourself with remaining funds in your FSA at the end of the benefits period due to a healthy year, any excess money typically reverts to your employer.

Here are some key points:

Rollovers: Certain workplaces offer the option to roll over a portion of unused funds into the following year's account. The IRS caps FSA rollovers at $610 for 2023.

Grace period: Some employers also provide a grace period of a few months to spend FSA funds from the previous year, although this isn't mandatory. Typically, these grace periods extend until mid-March.

Bottom Line

HSAs allow individuals to manage their funds over an extended period. On the other hand, FSAs necessitate spending the money within a specified timeframe or forfeiting it. As you weigh these financial tools against your needs and circumstances, understanding their nuances and tax implications becomes imperative. HSAs and FSAs offer tax benefits and help with managing healthcare expenses, making financial planning easier and more efficient.

Your tax professional or financial advisor can help you choose which account is right for you.

Sources:

https://www.nerdwallet.com/article/taxes/fsa-hsa-taxes

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

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