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Benefits of fsa vs hsa


benefits of fsa vs hsa

You cannot choose a Healthcare FSA if you are enrolled in an HDHP and eligible for the HSA. Use the Benefit Card to pay for eligible services and items;. work benefits, you're likely to come across FSA and HSA accounts that help you save for medical expenses. When it comes to FSA vs. HSA. HSA funds can be used for the same qualified medical expenses as FSA funds. And just like FSAs, from 2011 through 2019, a doctor's prescription.

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HSA vs. FSA: What's the Difference?

HSA vs. FSA Breakdown

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¹HSA limits for 2021 and FSA limits for 2021
²New legislation due to COVID-19 has allowed employers to increase the flexibility of some FSA accounts

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Источник: https://www.chime.com/blog/hsa-vs-fsa-breakdown/

FSA vs. HSA

What is FSA?

FSA stands for Flexible Spending Account. It allows an employee to set aside a portion of their salary to pay for qualified expenses such as medical or dependent care. Distribution of funds from an FSA is not taxed. It is owned by the employer and any unused/unclaimed amount is lost.

What is HSA?

HSA stands for Health Savings Account. It is a funded by individuals using pre-tax income and is available to those who are enrolled in high-deductible health plans. Distribution of funds from an HSA is not taxed if used for medical expenses. Funds are owned by the individual, are carried over from year to year, and are not forfeited when the individual changes employers or health plans.

This video compares the benefits and disadvantages of FSA to those of HSA:

Eligibility

Eligibility for an FSA is set by the employer and employers have complete flexibility to offer various combinations of benefits in designing their plan. For example, those with high-deductible plans may be limited to “limited purpose” FSAs used for dental, vision and other non-medical expenses. Employees can participate in an FSA even if they are not covered by any employer-sponsored health plan. Self-employed persons are not eligible for an FSA.

Individuals are eligible for a HSA if they have a high deductible health plan (HDHP). In 2015, this means a plan with a deductible of at least $1,350 for individuals or a family deductible of at least $2,600. The individual must not be covered by other non HDHP-health insurance or Medicare, and cannot be a dependent on another’s tax return.

Is a high deductible plan worth it?

The deductible can be paid out of the HSA, which essentially means paying for medical expenses with tax-free income. And high deductible plans usually provide much better coverage (lower copays and coinsurance) after the deductible is met. So high-deductible plans are a good choice for families that anticipate either little to no medical expenses, what is the routing number for first interstate bank sometimes for families that need a lot of medical services during the year.

Contribution Limits

Limits on FSA contributions are set by the employer. Starting 2013, the annual limit will be capped at $2,500 for employee contributions made via salary deductions. This $2,500 limit does not apply to non-elective contributions made by the employer — sometimes called flex credits. The limit remains unchanged for 2015.

In 2015, the annual contribution limit to an HSA is $3,350 for individual coverage and $6,650 for families. People over 55 years of age, and those turning 55 in the calendar year, can make an additional "catch up" contribution of $1,000. These limits apply to the combined contribution from the employee and the employer.

Account Ownership and Portability

An FSA account is owned by the employer. An HSA account is owned by the individual. This means when the individual terminates employment, unused funds in an FSA are forfeited. However, unused funds in an HSA continue to be owned by the individual. Distributions from an HSA can be made tax-free if used for medical expenses while enrolled in a high-deductible plan. In other cases, distributions can still be made benefits of fsa vs hsa an HSA but are subject to income taxes and a 10% penalty.

Access

Some employers structure their FSA so that the entire annual contribution amount can be accessed at any time (e.g., in January), even if it has not all been paid in yet. However, any money in an FSA that hasn’t been spent by the end of the year is lost and returned to the company. If, however, you leave the company and have spent more than has been paid in so far that year, you do not have to pay it back.

In HSAs, you can only access money that has already been deposited, but unused funds stay in the account indefinitely.

Changes to contributions

Contributions to FSAs can only be changed after certain events, such as marriage, divorce and the birth of a child, or during an open enrollment period.

HSA contributions can be changed on a monthly basis.

Rollover of unused funds

With an HSA, the funds are owned by the employee and they rollover i.e., benefits of fsa vs hsa contributed but not used in 2015 can be used for medical expenses in 2016 or in any year in the future.

The rules for FSAs are a little more complicated. Originally, FSAs were "use it or lose it" funds. If the funds contributed in 2014 are not used in 2014, employees lose access to them. There was one exception, though. Employers could choose to offer a two-and-a-half month grace period in the following year to use the funds i.e., you have until March 2015 to use your 2014 FSA funds. Starting 2014, the IRS changed its rules to also allow a limited rollover option. Employers can now allow their employees either the two-and-a-half month grace period in the following year to use all unused FSA funds, or the option to roll over up to $500 from the prior year's balance.

Rollover options for FSA plans. Employers can choose to offer no rollover, a limited $500 rollover to be used at any time in the following year, or a grace period until March 15 of the following year to use all unused funds.[1]
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Rollover options for FSA benefits of fsa vs hsa. Employers can choose to offer no rollover, a limited $500 rollover to be used at any time in the following year, or a grace period until March 15 of the following year to use all unused funds.[1]

Note that this is a decision the plan takes up front. Employees do not have the option to choose one or the other at the end of the year. So it is advisable to understand the employer's plan before choosing FSA contribution amounts during open enrollment.

Expenses Covered

There is considerable overlap in the eligible expenses for FSA and HSA accounts. These include:

  • Expenses eligible under the medical or prescription drug plan, such as deductibles or coinsurance
  • Medical supplies such as braces or first aid supplies
  • Vision and dental expenses for you or your tax qualified dependents
  • Preventative care such as annual physicals, immunizations, well-baby programs, mammograms, Pap tests and other cancer screenings, as well as non-medical expenses such as dental, orthodontics and vision.

COBRA & Medicare premiums are qualified expenses for an HSA but not eligible expenses for an FSA. Another advantage for HSAs is that you can use the HSA to pay for qualified health expenses for tax-qualified spouse or dependents, even if they are not covered under your high-deductible health plan. However, a disadvantage is that an HSA cannot be used to cover expenses for a domestic partner while an FSA usually is (depending upon how the employer has set it up).

Until 2012, over the counter medication and contraceptives were qualified expenses under FSA. However, a prescription is now required for any medication (other than insulin) to qualify as an FSA expense.

Other examples of expenses that would NOT be eligible for reimbursement are vitamins, massages, and cosmetic surgery.

Interest

FSAs do not gain interest, while HSAs do.

Tax Implications

FSA contributions are made on a pre-tax basis via salary deductions. This means the contribution made to an FSA is not subject to income tax.

HSAs earn tax-free interest and contributions are tax-deductible. Qualified withdrawals are also untaxed, but non-qualified withdrawals are subject to income tax and a 10% penalty.

It should be noted that both FSA and HSA contributions only avoid the income tax; they are still subject to Social Security and Medicare taxes.

How to Choose

An individual cannot use both an FSA and a HSA. Those who receive Medicare or do not have a high-deductible health plan cannot contribute to a HSA but can contribute to an FSA. However, you can only open an FSA if it is offered by your employer. Those who are young and single may prefer a HSA to an FSA, as unused contributions do not expire at the end of the year or if the individual changes jobs, allowing them to save up a large amount over their lifetime. Those who have fairly consistent medical costs through the year, or how to activate walmart prepaid debit card may need to use money from the scheme early in the year, may prefer FSAs.

References

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“Our new Constitution is now benefits of fsa vs hsa, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin, 1789



But was this illustrious founding father the first to introduce this now commonly known concept? The Yale Book of Quotations shows that Christopher Bullock said in 1716, “Tis impossible to be sure of anything but Death and Taxes.” And only eight years later, Edward Ward stated that “Death and Taxes, they are certain.”

Regardless of the origin, the fact that this sentiment still rings true hundreds of years later proves the perpetuation of us bank start rewards card balance inevitable: the majority of taxes are unavoidable, even when it comes to the financial burden associated with our health itself.

Fortunately, there are multiple options available for those seeking a tax-advantageous safety net of sorts — two of the most common are a Health Savings Account (HSA) or a Flexible Spending Account (FSA).

Breaking it down: What is the difference between FSA and HSA?

First, it’s important to note that both types of accounts serve to allocate pre-tax dollars to be set aside for specified purposes — including (but not limited to) medical, vision, and dental expenses you may incur throughout the term of your given plan.

  • HSAs are accounts you set up yourself. You can set up an account at your bank or credit union, for example. With this account, you can keep it no matter where you go or where you work (or if you work at all). You — and possibly your employer — contribute to the account throughout the year. The only stipulation is you must have a High Deductible Health Plan (HDHP) to have an HSA. Further, funds in an HSA can be rolled over each year, making it a smart choice if you plan on long-term savings.

Once your HSA is set up, you can allocate additional money to the account with automatic deductions from your paycheck, and all funds contributed are tax deductible. An HSA is also a good consideration for those who wish to carry their plan and funds with them, even if they choose to pursue a career with a different employer.

  • Your employer owns your health FSA, and both you and your employer can fund it. One of the key benefits of an FSA is that funds can be utilized for childcare expenses in addition to products and services related to your health. This type of plan is, however, a use-it or lose-it arrangement. There is a rollover provision, though. Up to $500 of your unused FSA funds benefits of fsa vs hsa be rolled over to the next year. If you contribute more throughout the year than you’re able to spend, you may find yourself scrambling to make doctor’s appointments in December to use up what you’ve put into your FSA.

As is the case with an HSA, you can apply funds to your FSA from your gross pay, which means that what every dollar you put in is considered a tax-free contribution. In addition, you’re not likely to owe taxes on any withdrawals as long as you use the funds strictly for qualified expenses.

Note: Self-employed filers are able to open an HSA but not an FSA.

How do health accounts help save on your taxes?

When you make qualified contributions to an HSA or health FSA, you can take a deduction for the amount of your contribution (or your contributions can reduce your taxable income on Form W-2). Either way, your income tax bill goes down.

If your employer makes qualified contributions for you, the amount of their contributions is not taxable.

Note: Health account contributions do not reduce your income tax subject to Social Security and Medicare tax.

Why not take a tax deduction for medical expenses instead?

Instead of setting up a health account, you could pay for your medical expenses with after-tax dollars and take a deduction. However, there’s one major problem with that.

You can only deduct medical expenses to the extent they exceed 7.5 percent of your adjusted gross income (AGI).

There goes most or all of your deduction. If you qualify for a health account or other plan, it’s usually well worth the trouble to set it up and use it for any qualified medical expense needs that arise throughout the tax year.

Contributing to an FSA or HSA can be a game changer.

Even those with the most robust medical, vision, or dental insurance policies may still find themselves wondering what might happen if their health plan fails to cover an unexpected expense. Depending on your individual circumstances, an HSA or FSA may offer the peace of mind you seek for yourself and your family — as both a safety net in times of need and a welcome break for at least some of those unavoidable taxes.

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Источник: https://blog.taxact.com/hsa-vs-fsa-how-does-your-health-plan-affect-your-taxes/

1Plans vary, but this is american express savings bank login an HSA generally works. You cannot open an HSA if, in addition to coverage under an HSA-qualified High Deductible Health Plan ("HDHP"), you are also covered under a Health Flexible Spending Account (FSA) or an HRA or any other health coverage that is not a HDHP. Prior to enrollment with an HSA provider, you must certify that you have enrolled or plan to enroll under a HDHP and are not covered under any other health coverage that is not a HDHP. Please refer to your plan documents, including specific information on your HSA, or contact your employer for more information on what’s covered and not covered by the plan. The HSA provider and/or trustee/custodian is solely responsible for all HSA services, transactions and activities. Cigna and your employer are not responsible for any aspects of the HSA services, administration or operation

2You may not benefits of fsa vs hsa under this option if you are considered self-employed (including partners and more-than-2% shareholders in a subchapter S corporation). Please refer to your plan documents, including specific information on your HRA, or contact your employer for more information

3A High Deductible Health Plan (HDHP) is a health plan which typically has lower premiums/plan contributions and higher deductibles than a traditional health plan. You cannot open an HSA if, in addition to coverage under an HSA-qualified HDHP, you are also covered under a Health Flexible Spending Account (FSA) or an HRA or any other health coverage that is not a HDHP. Prior to enrollment with an HSA provider, you must certify that you have enrolled or plan to enroll under a HDHP and are not covered under any other health coverage that is not a HDHP. The HSA provider and/or trustee/custodian is solely responsible for all HSA services, transactions and activities. Cigna benefits of fsa vs hsa your employer are not responsible for any aspects of the HSA services, administration or operation.

4To be eligible for reimbursement you must be working, looking for work or going to school. If you have a spouse or partner, they must also be working, looking for work or going to school.

5HSA contributions and earnings are not subject to federal taxes and not subject to state taxes in most states. A few states do not allow pretax treatment of contributions or earnings.

6Some cities and municipalities may impose income taxes on FSAs. For detailed information please contact your local department of taxation.

Источник: https://www.cigna.com/individuals-families/understanding-insurance/hsa-hra-fsa

HSA vs. Health FSA: Understanding the Difference

For a small business, offering benefits such as a Health Savings Account (HSA) or a Health Flexible Spending Account (Health FSA) can be an attractive recruitment and retention tool for employees.

You’ve likely already done research into these benefits, but we’ll help you dive in deeper with the differences between the two, so you can decide which is best for you and your business.

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What are Health FSAs and HSAs?

Health Flexible Spending Accounts and Health Savings Accounts are similar. Both allow employees to contribute pretax funds that can be used to pay for qualified health-care expenses (medical, dental, vision) like copays and deductibles as well as certain prescriptions and equipment.

Both types of account are a win-win for employees and employers. Since the funds contributed to these accounts aren’t subject to federal income tax, FICA, or FUTA taxes, as well as most (but not all) state taxes, employees’ taxable income is lowered and so is their tax burden.
And because your employees’ taxable income is lower, your tax burden as an employer is lower as well.

Which type of account should I make available for employees?

Health FSAs and HSAs provide similar tax benefits for you and your employees. But they differ in significant ways, including eligibility, contribution limits, and account ownership, among other things.
Whether you choose to make a Health FSA or HSA available to your employees really depends on your business and how much bandwidth you have to administer a program. To make the best decision for your business — and your employees — let’s take a side-by-side look at how each one works.

Who is eligible for an HSA? Who is eligible for a Health FSA?

HSAHealth FSA
Only employees covered by a high-deductible health-care plan can elect to contribute to an HSA account. For 2018, a high-deductible plan is a plan with a deductible of $1,350 for individuals and at least $2,700 for families.Any employee who meets the program’s eligibility requirements can elect to contribute to an employer’s Health FSA program, unless he or she has an HSA account. If an employee has an HSA account, they may opt in to a limited-purpose Health FSA, which will only cover out-of-pocket dental, vision, or preventive care expense on a first dollar basis.

What are the contribution limits for Health FSAs and HSAs? When can contribution elections be benefits of fsa vs hsa FSAIf you are single, the IRS HSA contribution limit for 2018 is $3,450. For a family, the contribution limit is set at $6,900. If you’re older than the age of 55, you’re allowed to “catch up” on your savings and contribute up to $1,000 for yourself. An employee can change their monthly contribution to an HSA account during the year, as long as they don’t surpass the yearly contribution limit.The 2018 IRS contribution limit for a Health FSA is $2,650. An employee has to decide how much to contribute to their Health FSA at the start of the year. Contribution elections cannot change during the year unless an employee has a change in family status (like getting married or divorced).

All of these contributions can be made pretax via payroll.

Are employee accounts credited with earnings?

HSAHealth FSA
HSA contributions are invested, and earnings are tax-deferred and credited to an employee’s account.Money contributed to a Health FSA does not earn interest.

Can contributions be forfeited?

HSAHealth FSA
Amounts remaining at the end of the plan year remain in the employee’s account and are not forfeited. An HSA is tied to the employee, who owns the account and can transfer the funds if they leave their job.Most plans are “use it or lose it,” meaning any amounts remaining in the Health FSA at the end of the plan year are forfeited. Employers may choose to offer a carryover option of $500 from one year to the next, but not all do.

Who can access the money in an account?

HSAHealth FSA
An employee has access to whatever the total amount of money is in the HSA account.Employees have access to their entire Health FSA annual election amount at any time, even if they have yet to actually contribute that amount from their paychecks.

Can you only benefits of fsa vs hsa HSAs and FSAs for health-care costs?

HSAHealth FSA
HSA accounts can only be used for qualified medical, vision, or dental expenses.An employer may also establish a dependent care FSA account. The maximum amount a family can contribute to a dependent care FSA in 2018 is $5,000.

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When you create a benefit, you set a deduction percentage or fixed amount to be withheld from benefits of fsa vs hsa employee’s paycheck. Benefit deductions and contributions are automatically calculated when you run payroll, and those funds are left in your bank account for you to distribute to the applicable benefit providers. Square Payroll also determines the taxability and reporting requirements for each benefit to make sure your taxes and tax forms are accurate.

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If you already use Square Payroll, you can enroll in benefits directly from the Square Payroll dashboard. You can choose the benefits that best suit your needs and budget, and we’ll take care of everything else, from employee enrollment to calculating deductions and contributions for each pay run. Square Payroll also determines the taxability and reporting requirements for each benefit to make sure your taxes and tax forms are accurate.

Create an account with Square Payroll to learn more about signing up for benefits. Or, if you already have benefits that you want pay my chase southwest credit card sync with Square Payroll, learn about adding your benefits to Payroll in our Support Center.

Источник: https://squareup.com/us/en/townsquare/hsa-vs-health-fsa

HSA vs. FSA: Which Is Better?

Depending on the kind of health insurance plan you have and the benefits your employer offers, you might be eligible for a health savings account (HSA) or a flexible spending account (FSA). Taking advantage of these accounts can help you save money and prepare for medical expenses that come up during the year.

HSAs and FSAs have different qualifications and advantages, however. Here's everything you need to better understand HSAs and FSAs before signing up.

What's the Difference Between an HSA and an FSA?

HSAFSA
Qualifications or RequirementsA high-deductible health plan (HDHP) is required. The minimum deductible to qualify is $1,400 for individual plans or $2,800 for family plans. You can't be enrolled in Medicare and you can't be declared a dependent on another person's plan.No requirements; usually offered through a group or employer.
What If You Change Employers?Unused money in an HSA stays with you even if you change employers.FSAs do not follow you to your new employer, so you may lose any money in the account that you don't use.
Rollover RulesUnused funds in your HSA will roll over every year and can be saved in your account for the long term.Typically, $550 can be carried into the next plan year or employers may allow an additional 2.5 months to spend the previous year's contributions, depending on what the employer allows. In some cases there are special rules allowing all funds to be carried over if the employer allowed it.
Annual Contribution LimitsFor 2022, the annual contribution limits are $3,650 for individual plans and $7,300 for family plans. That's up from $3,600 and $7,200 in 2021.For 2022, the individual FSA contribution limit is $2,750. It is up to your employer to allow contributions up to that limit or not.
Changes to ContributionsYes, as long as contributions are below the annual limit.Generally, changes can only be made during open enrollment, unless you have a qualifying life event, or you change your plan or employer.
Long-Term Savings PotentialYesNo
Penalty for Using the FundsPrior to age 65, funds you use for non-medical expenses must be declared on your tax return, and are subject to a 20% penalty. Accumulated savings can be withdrawn after age 65 in retirement and used without penalty.Penalties may depend on your employer and FSA. Contact your plan administrator or employer for details.
Tax SavingsContributions can be made pre-tax directly from your paycheck. Contributions are tax-deductible and grow tax-deferred. Accumulated savings can be withdrawn tax-free after age 65. Funds used for qualified medical expenses are not taxed.Contributions can be made pre-tax directly from your paycheck. Funds used for qualified medical expenses are not taxed.
Special NotesHSAs may be accessible in different ways; be sure to ask if you will have a debit card and how expenses and reimbursements work.FSAs may allow a small carryover or grace period. However, this is at the discretion of the plan administrator or employer, so contact yours for details.

Qualifications or Requirements

In order to be eligible for a health savings account, you must choose a high-deductible health plan (HDHP). You can't be declared a dependent on someone else's plan and you can't be enrolled in Medicare, either. You can open an account through your employer or on your own, and the minimum deductible for 2022 is $1,400 for individuals and $2,800 for families.

A flexible spending account can only be opened through an employer or other group offering it, but there are no additional qualifications or restrictions as there are with an HSA.

Qualified Health Expenses

HSAs and FSAs are meant to cover qualified health expenses. Health insurance premiums typically aren't considered a qualified medical expense by HSAs unless you're paying for COBRA coverage or receiving unemployment. Prescription medications, including insulin, can be paid for with both types of accounts. Over-the-counter medicine and menstrual care products are also qualified optum bank hsa card.

You can typically use the accounts to cover copayments and deductibles for doctor visits and hospital stays. Essential dental care is considered a qualified health expense, but teeth whitening isn't. Eyeglasses are also a qualified expense. In general, if it's something you could deduct as a medical expense on your taxes, you can use HSA or FSA funds to pay for benefits of fsa vs hsa can withdraw funds from an HSA to use for non-medical spending, but you will pay income tax and a 20% penalty until age 65. After age 65, you only pay income tax on amounts you withdraw for non-medical reasons, so an HSA could also be an additional source of retirement funds.

Restrictions

Because both types of plans offer a tax-free way to save for medical expenses, both come with restrictions. However, generally, FSAs are the more restrictive of the two plan types. For instance, you can't transfer your FSA to a new employer when you change jobs and you can only change your contribution during open enrollment or when you have a qualifying life event such as getting married or having a child. These limits don't apply to HSAs.

The biggest difference between the two accounts, though, is in terms of the money you can put in and how long you can keep it there. You can put more into an HSA each year and roll over your leftover balance at the end of the year.

For 2022, the annual contribution limit for an HSA is $3,650 for individuals and $7,300 for families. For an FSA, the 2022 annual contribution limit is $2,750 (unchanged from 2021).

With an FSA, employers may allow you to carry over up to $550 to the next plan year or allow you a 2.5-month grace period to spend the previous year's funds. If your employer allows rollovers, you may be able to carry over your full contributions from 2021 to 2022.

Tax Incentives and Savings Potential

Both HSAs and FSAs offer the same tax advantages upfront—you can put money into the accounts and withdraw it to pay medical expenses tax-free. However, HSAs offer far greater tax advantages and savings potential.

Because you can roll over your balance each year, your HSA becomes another savings vehicle within your broader financial portfolio. This money also grows tax-deferred, meaning you won't pay any taxes on the growth until you withdraw the money. However, if you wait to withdraw that money after age 65, during retirement, you can withdraw it tax-free. Because of these features, many people use an HSA as a secondary retirement savings account.

With both HSAs and FSAs, you benefit from tax savings because the funds you deposit are pre-tax. That means they're deducted from your income before taxes are taken out. This reduces the amount of your taxable income.

Which Is Benefits of fsa vs hsa for You?

Overall, HSAs are more flexible. They allow you to save money by paying less in taxes and enable you to save money long term since whatever you don't use in any given year will roll over and accumulate as savings over time. You do have to have an HDHP, though, and not everyone is comfortable with a high-deductible insurance plan.

An FSA doesn't build up over time, and you can lose leftover funds at the end of the year. You also stand to lose your FSA if you change employers. An FSA does offer tax savings and budgeting for medical expenses, so if you don't qualify for an HSA, an FSA is also a good option.

Can You Have an HSA and an FSA at the Same Time?

You can only have an HSA and an FSA at the same time if the FSA is designated as a limited-purpose FSA. These FSAs must have a specified purpose, such as covering long-term care costs rather than the regular medical expenses being covered by the HSA.

Impact of the CARES Act on FSAs and HSAs

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created important provisions for health savings accounts (HSAs) and flexible spending accounts (FSAs) for 2020 and 2021.

One crucial change applied to telehealth appointments. Under the CARES Act, patients with high-deductible health plans paired with HSAs can have telehealth appointments before they meet their deductible. The second provision allows over-the-counter medical products as eligible expenses for HSAs and FSAs without a prescription, something not available before the new law.

In addition, on Dec. 27, 2020, the Consolidated Appropriations Act 2021 was signed into law, which impacted some CARES Act provisions. Under this, taxpayers with FSAs and dependent care flexible spending accounts could roll over funds from 2020 to 2021 and from 2021 to 2022. Employers were also allowed to let their employees make a 2021 mid-year change in their contribution amounts to these types of accounts.

Key Takeaways

  • HSAs and FSAs are both tax-advantaged savings accounts for medical expenses.
  • You must have a high-deductible health plan to contribute to an HSA.
  • HSA funds can carry over from year to year, from employer to employer, and you can withdraw funds after age 65 to use them for non-medical purposes without paying a penalty.
  • FSAs are typically offered by employers, and funds typically don't carry over in full from year to year (though special rules apply for rollovers from 2021 to 2022).
  • If you don't have access to an HSA, and FSA is another good option.

What Expenses Are HSA Eligible?

Qualified medical expenses and some insurance premiums are HSA eligible. Long-term care insurance premiums, COBRA premiums, and health insurance premiums, while you're on unemployment, are all eligible. The IRS considers medical expenses to be the "costs of diagnosis, cure, mitigation, treatment, or prevention of disease." This ranges from menstrual care products and over-the-counter medicine to diagnostic devices, like a blood sugar test kit, hospital services, and psychiatric care.

What Is Covered By an FSA?

FSAs cover the same expenses as HSAs, which are qualified medical expenses and some insurance premiums. Qualified medical expenses include prescriptions, ambulance services, and various types of therapy. Like HSAs, FSAs don't cover care that isn't medically necessary, including cosmetic surgery, gym memberships, maternity clothes, and nutritional supplements.

Источник: https://www.thebalance.com/differences-between-hsa-and-fsa-and-best-options-4156726
benefits of fsa vs hsa

Benefits of fsa vs hsa -

HSA vs. FSA: Which Is Better?

Depending on the kind of health insurance plan you have and the benefits your employer offers, you might be eligible for a health savings account (HSA) or a flexible spending account (FSA). Taking advantage of these accounts can help you save money and prepare for medical expenses that come up during the year.

HSAs and FSAs have different qualifications and advantages, however. Here's everything you need to better understand HSAs and FSAs before signing up.

What's the Difference Between an HSA and an FSA?

HSAFSA
Qualifications or RequirementsA high-deductible health plan (HDHP) is required. The minimum deductible to qualify is $1,400 for individual plans or $2,800 for family plans. You can't be enrolled in Medicare and you can't be declared a dependent on another person's plan.No requirements; usually offered through a group or employer.
What If You Change Employers?Unused money in an HSA stays with you even if you change employers.FSAs do not follow you to your new employer, so you may lose any money in the account that you don't use.
Rollover RulesUnused funds in your HSA will roll over every year and can be saved in your account for the long term.Typically, $550 can be carried into the next plan year or employers may allow an additional 2.5 months to spend the previous year's contributions, depending on what the employer allows. In some cases there are special rules allowing all funds to be carried over if the employer allowed it.
Annual Contribution LimitsFor 2022, the annual contribution limits are $3,650 for individual plans and $7,300 for family plans. That's up from $3,600 and $7,200 in 2021.For 2022, the individual FSA contribution limit is $2,750. It is up to your employer to allow contributions up to that limit or not.
Changes to ContributionsYes, as long as contributions are below the annual limit.Generally, changes can only be made during open enrollment, unless you have a qualifying life event, or you change your plan or employer.
Long-Term Savings PotentialYesNo
Penalty for Using the FundsPrior to age 65, funds you use for non-medical expenses must be declared on your tax return, and are subject to a 20% penalty. Accumulated savings can be withdrawn after age 65 in retirement and used without penalty.Penalties may depend on your employer and FSA. Contact your plan administrator or employer for details.
Tax SavingsContributions can be made pre-tax directly from your paycheck. Contributions are tax-deductible and grow tax-deferred. Accumulated savings can be withdrawn tax-free after age 65. Funds used for qualified medical expenses are not taxed.Contributions can be made pre-tax directly from your paycheck. Funds used for qualified medical expenses are not taxed.
Special NotesHSAs may be accessible in different ways; be sure to ask if you will have a debit card and how expenses and reimbursements work.FSAs may allow a small carryover or grace period. However, this is at the discretion of the plan administrator or employer, so contact yours for details.

Qualifications or Requirements

In order to be eligible for a health savings account, you must choose a high-deductible health plan (HDHP). You can't be declared a dependent on someone else's plan and you can't be enrolled in Medicare, either. You can open an account through your employer or on your own, and the minimum deductible for 2022 is $1,400 for individuals and $2,800 for families.

A flexible spending account can only be opened through an employer or other group offering it, but there are no additional qualifications or restrictions as there are with an HSA.

Qualified Health Expenses

HSAs and FSAs are meant to cover qualified health expenses. Health insurance premiums typically aren't considered a qualified medical expense by HSAs unless you're paying for COBRA coverage or receiving unemployment. Prescription medications, including insulin, can be paid for with both types of accounts. Over-the-counter medicine and menstrual care products are also qualified expenses.

You can typically use the accounts to cover copayments and deductibles for doctor visits and hospital stays. Essential dental care is considered a qualified health expense, but teeth whitening isn't. Eyeglasses are also a qualified expense. In general, if it's something you could deduct as a medical expense on your taxes, you can use HSA or FSA funds to pay for it.

You can withdraw funds from an HSA to use for non-medical spending, but you will pay income tax and a 20% penalty until age 65. After age 65, you only pay income tax on amounts you withdraw for non-medical reasons, so an HSA could also be an additional source of retirement funds.

Restrictions

Because both types of plans offer a tax-free way to save for medical expenses, both come with restrictions. However, generally, FSAs are the more restrictive of the two plan types. For instance, you can't transfer your FSA to a new employer when you change jobs and you can only change your contribution during open enrollment or when you have a qualifying life event such as getting married or having a child. These limits don't apply to HSAs.

The biggest difference between the two accounts, though, is in terms of the money you can put in and how long you can keep it there. You can put more into an HSA each year and roll over your leftover balance at the end of the year.

For 2022, the annual contribution limit for an HSA is $3,650 for individuals and $7,300 for families. For an FSA, the 2022 annual contribution limit is $2,750 (unchanged from 2021).

With an FSA, employers may allow you to carry over up to $550 to the next plan year or allow you a 2.5-month grace period to spend the previous year's funds. If your employer allows rollovers, you may be able to carry over your full contributions from 2021 to 2022.

Tax Incentives and Savings Potential

Both HSAs and FSAs offer the same tax advantages upfront—you can put money into the accounts and withdraw it to pay medical expenses tax-free. However, HSAs offer far greater tax advantages and savings potential.

Because you can roll over your balance each year, your HSA becomes another savings vehicle within your broader financial portfolio. This money also grows tax-deferred, meaning you won't pay any taxes on the growth until you withdraw the money. However, if you wait to withdraw that money after age 65, during retirement, you can withdraw it tax-free. Because of these features, many people use an HSA as a secondary retirement savings account.

With both HSAs and FSAs, you benefit from tax savings because the funds you deposit are pre-tax. That means they're deducted from your income before taxes are taken out. This reduces the amount of your taxable income.

Which Is Right for You?

Overall, HSAs are more flexible. They allow you to save money by paying less in taxes and enable you to save money long term since whatever you don't use in any given year will roll over and accumulate as savings over time. You do have to have an HDHP, though, and not everyone is comfortable with a high-deductible insurance plan.

An FSA doesn't build up over time, and you can lose leftover funds at the end of the year. You also stand to lose your FSA if you change employers. An FSA does offer tax savings and budgeting for medical expenses, so if you don't qualify for an HSA, an FSA is also a good option.

Can You Have an HSA and an FSA at the Same Time?

You can only have an HSA and an FSA at the same time if the FSA is designated as a limited-purpose FSA. These FSAs must have a specified purpose, such as covering long-term care costs rather than the regular medical expenses being covered by the HSA.

Impact of the CARES Act on FSAs and HSAs

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created important provisions for health savings accounts (HSAs) and flexible spending accounts (FSAs) for 2020 and 2021.

One crucial change applied to telehealth appointments. Under the CARES Act, patients with high-deductible health plans paired with HSAs can have telehealth appointments before they meet their deductible. The second provision allows over-the-counter medical products as eligible expenses for HSAs and FSAs without a prescription, something not available before the new law.

In addition, on Dec. 27, 2020, the Consolidated Appropriations Act 2021 was signed into law, which impacted some CARES Act provisions. Under this, taxpayers with FSAs and dependent care flexible spending accounts could roll over funds from 2020 to 2021 and from 2021 to 2022. Employers were also allowed to let their employees make a 2021 mid-year change in their contribution amounts to these types of accounts.

Key Takeaways

  • HSAs and FSAs are both tax-advantaged savings accounts for medical expenses.
  • You must have a high-deductible health plan to contribute to an HSA.
  • HSA funds can carry over from year to year, from employer to employer, and you can withdraw funds after age 65 to use them for non-medical purposes without paying a penalty.
  • FSAs are typically offered by employers, and funds typically don't carry over in full from year to year (though special rules apply for rollovers from 2021 to 2022).
  • If you don't have access to an HSA, and FSA is another good option.

What Expenses Are HSA Eligible?

Qualified medical expenses and some insurance premiums are HSA eligible. Long-term care insurance premiums, COBRA premiums, and health insurance premiums, while you're on unemployment, are all eligible. The IRS considers medical expenses to be the "costs of diagnosis, cure, mitigation, treatment, or prevention of disease." This ranges from menstrual care products and over-the-counter medicine to diagnostic devices, like a blood sugar test kit, hospital services, and psychiatric care.

What Is Covered By an FSA?

FSAs cover the same expenses as HSAs, which are qualified medical expenses and some insurance premiums. Qualified medical expenses include prescriptions, ambulance services, and various types of therapy. Like HSAs, FSAs don't cover care that isn't medically necessary, including cosmetic surgery, gym memberships, maternity clothes, and nutritional supplements.

Источник: https://www.thebalance.com/differences-between-hsa-and-fsa-and-best-options-4156726

What’s the difference between an HSA and FSA?

HomeVision InsuranceFSA and HSA Vision Resources

Man holding sunglasses

A health savings account (HSA) and a flexible spending account (FSA) have a lot in common, but they aren’t without their differences. Among other distinctions, an HSA requires the account holder to have a high-deductible health plan, while health insurance is unnecessary to open an FSA.

These accounts can play a big role in deciding which health insurance plan you enroll in, so it’s important to understand the pros and cons of each one.

SEE RELATED:HSA and FSA health resources

HSA

An HSA is a pre-tax savings account used for eligible health expenses. These include vision expenses like prescription glasses and contacts, in addition to medical and dental expenses like appointment copays and medication.

Account holders decide how much money to contribute before the year starts. Funds are then gradually withdrawn from an employee’s paycheck in equal installments throughout the year.

There’s one big requirement for an HSA: The account holder needs to have a high-deductible health plan (HDHP). An HDHP can be an HMO, PPO, POS (point of service) or EPO (exclusive provider organization) plan.

To classify as a high-deductible health plan in 2021, coverage needs to have deductibles of at least $1,400 (individual) and $2,800 (family). Out-of-pocket maximums cannot cap higher than $7,000 (individual) and $14,000 (family).

While an HSA can still be beneficial in the short term, it’s generally more useful over longer periods of time.

The key features of an HSA are:

  • Contributions are not taxed and can be spent on HSA-eligible health expenses.

  • The account holder needs to be insured with a qualifying high-deductible health plan (HDHP).

  • The contribution limit doubles if more than one person is insured on the corresponding health plan.

  • The annual contribution amount can be changed at any point during the year.

  • All funds roll over to the next year at the end of the current one.

  • All funds transfer if you change jobs.

SEE RELATED:How to check your HSA or FSA balance

FSA

Like its counterpart, an FSA is also a pre-tax account that can be spent on eligible health expenses. Money will also be automatically withdrawn from your paycheck in equal amounts.

Unlike an HSA, you do not need health insurance to open an FSA — but most people will be enrolled anyway. FSAs are commonly associated with a PPO, though not exclusively.

Due to its tight rollover and job-change restrictions, an FSA is best served as a short-term account handled year by year.

The key features of an FSA are:

  • Contributions are not taxed and can be used to pay for eligible health expenses.

  • Eligibility is open, so you can sign up with any type of insurance coverage — or none at all.

  • The FSA contribution limit does not change, no matter how many people are associated with the account.

  • The annual contribution amount cannot be changed after enrollment without certain qualifying life events.

  • Funds typically do not roll over at the end of the year, unless your employer offers a partial rollover up to $550. Any money left over will need to be spent, or it will be lost and returned to the employer.

  • Funds do not transfer if you change jobs. Any money left over will need to be spent or it will be lost and returned to the employer.

SEE RELATED:How do I enroll in an FSA?

Which is better — an HSA or an FSA?

On the surface, the overall freedom to shift and roll over funds offers the HSA a serious advantage. But it isn’t always that simple.

Comparing the two accounts is less like comparing apples to oranges, and more like comparing a red apple to a yellow apple. They may look a little different, and one is a little more popular, but both can be beneficial.

While the freedom of an HSA cannot be overstated, it does need to be associated with a high-deductible health plan. That can be a plus for some but a snag for others.

Since HDHPs require higher deductibles and out-of-pocket maximums, they tend to benefit younger and/or healthier people the most. Premiums will be lower, so covered individuals can keep their annual insurance costs low if they don’t require much medical care. Combined with the benefits of an HSA, that’s tough to beat.

But health care — and health in general — aren’t always predictable, and certain HDHPs can be very expensive for people who incur significant medical costs throughout the year.

Combined costs and savings are an important factor when you have the option of enrolling in a high-deductible, lower-premium plan with an HSA or a lower-deductible, higher-premium plan with an FSA.

Who is eligible?Those with a qualifying high-deductible health plan (HDHP).Anyone whose employer offers it. You do not need to have health insurance to open an account.
What are the contribution limits for 2021?$3,600 for an individual; $7,200 for a family.$2,750.*
Who contributes to the account?The employee, the employer, or both.The employee, the employer, or both.
Do unused funds roll over at the end of the year?Yes.Not traditionally, but an employer can choose to allow as much as $550 to roll over.
Who owns the account?The employee.The employer.
Can self-employed people qualify?Yes, if they’re covered by an HDHP.No.
What happens if I change jobs?100% of the funds will be transferred to your new job.None of the funds will be transferred.
Can I change my total contribution amount throughout the year?Yes.No, except in the case of certain qualifying life events and if your specific plan allows.
Can I withdraw money from the account?Yes, but applicable taxes plus a 20% penalty will be withheld.No.

Page published in August 2019

Page updated in November 2021

Источник: https://www.allaboutvision.com/vision-insurance/difference-between-hsa-and-fsa/

HSA vs. FSA Breakdown

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¹HSA limits for 2021 and FSA limits for 2021
²New legislation due to COVID-19 has allowed employers to increase the flexibility of some FSA accounts

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Источник: https://www.chime.com/blog/hsa-vs-fsa-breakdown/

FSA vs. HSA

What is FSA?

FSA stands for Flexible Spending Account. It allows an employee to set aside a portion of their salary to pay for qualified expenses such as medical or dependent care. Distribution of funds from an FSA is not taxed. It is owned by the employer and any unused/unclaimed amount is lost.

What is HSA?

HSA stands for Health Savings Account. It is a funded by individuals using pre-tax income and is available to those who are enrolled in high-deductible health plans. Distribution of funds from an HSA is not taxed if used for medical expenses. Funds are owned by the individual, are carried over from year to year, and are not forfeited when the individual changes employers or health plans.

This video compares the benefits and disadvantages of FSA to those of HSA:

Eligibility

Eligibility for an FSA is set by the employer and employers have complete flexibility to offer various combinations of benefits in designing their plan. For example, those with high-deductible plans may be limited to “limited purpose” FSAs used for dental, vision and other non-medical expenses. Employees can participate in an FSA even if they are not covered by any employer-sponsored health plan. Self-employed persons are not eligible for an FSA.

Individuals are eligible for a HSA if they have a high deductible health plan (HDHP). In 2015, this means a plan with a deductible of at least $1,350 for individuals or a family deductible of at least $2,600. The individual must not be covered by other non HDHP-health insurance or Medicare, and cannot be a dependent on another’s tax return.

Is a high deductible plan worth it?

The deductible can be paid out of the HSA, which essentially means paying for medical expenses with tax-free income. And high deductible plans usually provide much better coverage (lower copays and coinsurance) after the deductible is met. So high-deductible plans are a good choice for families that anticipate either little to no medical expenses, or sometimes for families that need a lot of medical services during the year.

Contribution Limits

Limits on FSA contributions are set by the employer. Starting 2013, the annual limit will be capped at $2,500 for employee contributions made via salary deductions. This $2,500 limit does not apply to non-elective contributions made by the employer — sometimes called flex credits. The limit remains unchanged for 2015.

In 2015, the annual contribution limit to an HSA is $3,350 for individual coverage and $6,650 for families. People over 55 years of age, and those turning 55 in the calendar year, can make an additional "catch up" contribution of $1,000. These limits apply to the combined contribution from the employee and the employer.

Account Ownership and Portability

An FSA account is owned by the employer. An HSA account is owned by the individual. This means when the individual terminates employment, unused funds in an FSA are forfeited. However, unused funds in an HSA continue to be owned by the individual. Distributions from an HSA can be made tax-free if used for medical expenses while enrolled in a high-deductible plan. In other cases, distributions can still be made from an HSA but are subject to income taxes and a 10% penalty.

Access

Some employers structure their FSA so that the entire annual contribution amount can be accessed at any time (e.g., in January), even if it has not all been paid in yet. However, any money in an FSA that hasn’t been spent by the end of the year is lost and returned to the company. If, however, you leave the company and have spent more than has been paid in so far that year, you do not have to pay it back.

In HSAs, you can only access money that has already been deposited, but unused funds stay in the account indefinitely.

Changes to contributions

Contributions to FSAs can only be changed after certain events, such as marriage, divorce and the birth of a child, or during an open enrollment period.

HSA contributions can be changed on a monthly basis.

Rollover of unused funds

With an HSA, the funds are owned by the employee and they rollover i.e., funds contributed but not used in 2015 can be used for medical expenses in 2016 or in any year in the future.

The rules for FSAs are a little more complicated. Originally, FSAs were "use it or lose it" funds. If the funds contributed in 2014 are not used in 2014, employees lose access to them. There was one exception, though. Employers could choose to offer a two-and-a-half month grace period in the following year to use the funds i.e., you have until March 2015 to use your 2014 FSA funds. Starting 2014, the IRS changed its rules to also allow a limited rollover option. Employers can now allow their employees either the two-and-a-half month grace period in the following year to use all unused FSA funds, or the option to roll over up to $500 from the prior year's balance.

Rollover options for FSA plans. Employers can choose to offer no rollover, a limited $500 rollover to be used at any time in the following year, or a grace period until March 15 of the following year to use all unused funds.[1]
magnify
Rollover options for FSA plans. Employers can choose to offer no rollover, a limited $500 rollover to be used at any time in the following year, or a grace period until March 15 of the following year to use all unused funds.[1]

Note that this is a decision the plan takes up front. Employees do not have the option to choose one or the other at the end of the year. So it is advisable to understand the employer's plan before choosing FSA contribution amounts during open enrollment.

Expenses Covered

There is considerable overlap in the eligible expenses for FSA and HSA accounts. These include:

  • Expenses eligible under the medical or prescription drug plan, such as deductibles or coinsurance
  • Medical supplies such as braces or first aid supplies
  • Vision and dental expenses for you or your tax qualified dependents
  • Preventative care such as annual physicals, immunizations, well-baby programs, mammograms, Pap tests and other cancer screenings, as well as non-medical expenses such as dental, orthodontics and vision.

COBRA & Medicare premiums are qualified expenses for an HSA but not eligible expenses for an FSA. Another advantage for HSAs is that you can use the HSA to pay for qualified health expenses for tax-qualified spouse or dependents, even if they are not covered under your high-deductible health plan. However, a disadvantage is that an HSA cannot be used to cover expenses for a domestic partner while an FSA usually is (depending upon how the employer has set it up).

Until 2012, over the counter medication and contraceptives were qualified expenses under FSA. However, a prescription is now required for any medication (other than insulin) to qualify as an FSA expense.

Other examples of expenses that would NOT be eligible for reimbursement are vitamins, massages, and cosmetic surgery.

Interest

FSAs do not gain interest, while HSAs do.

Tax Implications

FSA contributions are made on a pre-tax basis via salary deductions. This means the contribution made to an FSA is not subject to income tax.

HSAs earn tax-free interest and contributions are tax-deductible. Qualified withdrawals are also untaxed, but non-qualified withdrawals are subject to income tax and a 10% penalty.

It should be noted that both FSA and HSA contributions only avoid the income tax; they are still subject to Social Security and Medicare taxes.

How to Choose

An individual cannot use both an FSA and a HSA. Those who receive Medicare or do not have a high-deductible health plan cannot contribute to a HSA but can contribute to an FSA. However, you can only open an FSA if it is offered by your employer. Those who are young and single may prefer a HSA to an FSA, as unused contributions do not expire at the end of the year or if the individual changes jobs, allowing them to save up a large amount over their lifetime. Those who have fairly consistent medical costs through the year, or who may need to use money from the scheme early in the year, may prefer FSAs.

References

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“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin, 1789



But was this illustrious founding father the first to introduce this now commonly known concept? The Yale Book of Quotations shows that Christopher Bullock said in 1716, “Tis impossible to be sure of anything but Death and Taxes.” And only eight years later, Edward Ward stated that “Death and Taxes, they are certain.”

Regardless of the origin, the fact that this sentiment still rings true hundreds of years later proves the perpetuation of the inevitable: the majority of taxes are unavoidable, even when it comes to the financial burden associated with our health itself.

Fortunately, there are multiple options available for those seeking a tax-advantageous safety net of sorts — two of the most common are a Health Savings Account (HSA) or a Flexible Spending Account (FSA).

Breaking it down: What is the difference between FSA and HSA?

First, it’s important to note that both types of accounts serve to allocate pre-tax dollars to be set aside for specified purposes — including (but not limited to) medical, vision, and dental expenses you may incur throughout the term of your given plan.

  • HSAs are accounts you set up yourself. You can set up an account at your bank or credit union, for example. With this account, you can keep it no matter where you go or where you work (or if you work at all). You — and possibly your employer — contribute to the account throughout the year. The only stipulation is you must have a High Deductible Health Plan (HDHP) to have an HSA. Further, funds in an HSA can be rolled over each year, making it a smart choice if you plan on long-term savings.

Once your HSA is set up, you can allocate additional money to the account with automatic deductions from your paycheck, and all funds contributed are tax deductible. An HSA is also a good consideration for those who wish to carry their plan and funds with them, even if they choose to pursue a career with a different employer.

  • Your employer owns your health FSA, and both you and your employer can fund it. One of the key benefits of an FSA is that funds can be utilized for childcare expenses in addition to products and services related to your health. This type of plan is, however, a use-it or lose-it arrangement. There is a rollover provision, though. Up to $500 of your unused FSA funds can be rolled over to the next year. If you contribute more throughout the year than you’re able to spend, you may find yourself scrambling to make doctor’s appointments in December to use up what you’ve put into your FSA.

As is the case with an HSA, you can apply funds to your FSA from your gross pay, which means that what every dollar you put in is considered a tax-free contribution. In addition, you’re not likely to owe taxes on any withdrawals as long as you use the funds strictly for qualified expenses.

Note: Self-employed filers are able to open an HSA but not an FSA.

How do health accounts help save on your taxes?

When you make qualified contributions to an HSA or health FSA, you can take a deduction for the amount of your contribution (or your contributions can reduce your taxable income on Form W-2). Either way, your income tax bill goes down.

If your employer makes qualified contributions for you, the amount of their contributions is not taxable.

Note: Health account contributions do not reduce your income tax subject to Social Security and Medicare tax.

Why not take a tax deduction for medical expenses instead?

Instead of setting up a health account, you could pay for your medical expenses with after-tax dollars and take a deduction. However, there’s one major problem with that.

You can only deduct medical expenses to the extent they exceed 7.5 percent of your adjusted gross income (AGI).

There goes most or all of your deduction. If you qualify for a health account or other plan, it’s usually well worth the trouble to set it up and use it for any qualified medical expense needs that arise throughout the tax year.

Contributing to an FSA or HSA can be a game changer.

Even those with the most robust medical, vision, or dental insurance policies may still find themselves wondering what might happen if their health plan fails to cover an unexpected expense. Depending on your individual circumstances, an HSA or FSA may offer the peace of mind you seek for yourself and your family — as both a safety net in times of need and a welcome break for at least some of those unavoidable taxes.

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Источник: https://blog.taxact.com/hsa-vs-fsa-how-does-your-health-plan-affect-your-taxes/

FSA vs HSA: Which Plan is Better For You and Your Company?

At the top of the list of the most requested benefits by employees is the ability to cover health care costs. More and more employers are making available Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) to their employees to help them budget for medical expenses.

This article is for employees who have the option to choose between an FSA and an HSA, and want to know how this impacts personal finances. However, we also offer some help for employers who are deciding between which one to offer and the differences from a company perspective.

FSA vs HSA – What’s the difference?

While FSAs and HSAs are both tax-incentivized plans in which you can set aside money for qualified medical expenses, the main differences are in eligibility, contribution limits, and rollver capabilities. You can find more details on each of these below.

Why should I care about an FSA or HSA at all?

The main reason is that FSA and HSA plans are “Cafeteria Plans” governed by IRS Section 125, which allows you to deduct a portion of every paycheck on a pre-tax basis and reduce your taxable income. By contributing with pre-tax dollars to a FSA or HSA to cover eligible medical, dental, and vision expenses, you can increase your take home pay.

Let’s assume that you make $60,000 per year, have a tax rate of 25%, and spend $2,500 out-of-pocket in expenses not covered by your medical plan.

Your Annual IncomeFSA/HSA Pre-Tax ContributionTaxable IncomeTaxes (25%)After-Tax Medical ExpensesTake Home Pay
Without FSA or HSA$60,000$0$60,000-$15,000– $2,500$42,500
With FSA or HSA$60,000– $2,500$57,500-$14,375$0$43,125

If you were not to opt for a medical cafeteria plan, then you would only be able to deduct qualified medical expenses that exceed 10% of your adjusted gross income (AGI). Assuming that your AGI were $50,000, you would only be able to deduct medical expenses in excess of $5,000 and have to wait as much as a whole year to take advantage of that tax break. With an FSA or HSA, you can reduce your tax liability and keep more of your paycheck right away.

So, which plan should I choose? HSA or FSA?

While a FSA doesn’t have eligibility requirements, an HSA is only available to individuals who:

  • Are enrolled in a High Deductible Health Plan (HDPH) with an annual deductible of at least $1,300 for personal coverage or at least $2,600 for family coverage

  • Are not listed as a dependent on another person’s tax return

  • Aren’t enrolled in Medicare

If you don’t meet all of these criteria, then you have no option than to choose a FSA. Which of course, given its tax advantage, it’s not a bad situation at all. However, what if you were to have both options available? Let’s run some key criteria to consider to determine the better fit.

1. What are your annual medical expenses?

The higher your eligible medical expenses, the more it makes sense to choose an HSA over a FSA. In 2017, you can only contribute up to $2,600 to an FSA for individual coverage. On the other hand, you can contribute up to $3,400 to an HSA for individual coverage.

2. Have you reached age 55?

Starting age 55, HSA plan holders can make a catch-up contribution on top of the regular limit. In 2017, that annual catch-up contribution can be of up to $1,000. Additionally, if you were to have a family HSA plan and your spouse were to be over age 55 as well, then each one of you could contribute an extra $1,000 per year to the plan.

3. Have you reached age 65?

The older you’re, the more it pays to hold an HSA. Starting age 65, you can use your HSA funds for non-qualifying medical expenses without the hefty 20% penalty from the IRS. Still, you’ll be liable for applicable income taxes.

4. Do you need flexibility in changing contribution amounts?

With a FSA, you can only adjust your contribution from each paycheck during open enrollment or during a qualifying life event, such as marriage or birth of a child. With an HSA, you can adjust your paycheck contribution throughout the year.

5. How predictable are your medical expenses?

Depending on your ability to budget for medical expenses, you may or may not find yourself at the end of the year with a balance on your plan.

Any unused balance on a FSA by December 31st of every year is subject to a “use it or lose it” rule. An employer may choose to let you carry over up to $500 to the next year, the entire balance until March 15th of the next year, or nothing at all. Under law, an employer is not forced to let you carry over an unused FSA balance. On the other hand, an HSA allows you to carry over any unused balance year after year.

6. Does your employer provide matching contributions?

While employers can provide matching contributions to both FSAs and HSAs, your employer may chose to only provide matching contributions to one type of plan. Inquire with your HR department for more details.

7. Do you need to supplement your retirement savings?

There are three ways an HSA can help retirement savers.

  • Since you can carry over unused HSA balances year after year, then you could create a separate fund for medical expenses during retirement and boost your total retirement savings. For example, in 2018 you could contribute up to $18,500 to a 401(k) for non-medical expenses and up to $3,400 to an HSA with individual coverage for qualifying medical expenses.

  • While distributions from a 401(k) during retirement are subject to applicable income taxes, withdrawals from an HSA aren’t subject to taxes as long as they’re used for qualifying medical expenses.

  • Contributions to an HSA can gain interest. Depending on your provider, you could choose from a wide range of options, including savings accounts insured by the FDIC, mutual funds, and index funds.

8. How long do you plan to stay with your current employer?

The balance on your HSA is always portable from one employer to another. The one on your FSA is only portable for FSA continuation through COBRA.

Can I use both an FSA and an HSA?

The only way for you to be able to enroll in both a FSA and HSA is to select an HSA and a limited-purpose FSA. By limiting a FSA to eligible dental and vision expenses, the IRS allows you to contribute to a both types of plans. Choosing a limited-purpose FSA plan allows you to minimize withdrawals from an HSA, allow funds in the HSA to grow tax-free longer, and cover medical and vision expenses with pre-tax dollars from the limited-purpose FSA.

To learn more about other types of FSA plans, review Beyond an FSA: Dependent Care, HSA, Adoption, and More.

For employers: Offering FSAs and HSAs to your employees

By offering ways to help your employees use tax-free dollars to better manage their healthcare costs, you’ll have a powerful tool to recruit and retain talent. However, it’s important to understand the pros and cons of offering these plans from a company perspective.

Pro: Tax breaks for the company

When an employee enrolls in an HSA or FSA, the employer no longer has to pay his portion of the Social Security (6.2%) and Medicare (1.45%) taxes on the employee’s contributions to those accounts. This means that the employer reduces his payroll taxes by 7.65% of total employee contributions.

Let’s imagine that a company has 20 employees and a total payroll of $1 million. Without a FSA or HSA plan, the company would owe $76,500 in Social Security and Medicare taxes. However, if each of the 20 employees were to contribute $2,600 to a FSA, then the employer would save $3,978 in annual taxes.

Additionally, employers who match contributions to FSAs and HSAs don’t have to pay payroll taxes on those matched funds. The costs of running the program in-house or outsourcing it to a third party are tax deductible as business expenses.

Con: Potential cash crunch for the company

Under the Uniform Coverage Rule, an employee enrolled in a FSA is entitled to receive the full amount of her annual election since day one of the plan, regardless of how much the employee has contributed. This means that in the example of our 20-employee company, assuming that all 20 employees were to make an annual election of $2,600, the company has to be ready from the first day of the FSA to provide a reimbursement of up to $52,000. And the company can’t recover reimbursements once it lays off or fires an employee.

To avoid a cash crunch, a company must set aside enough cash to address FSA reimbursements that fall short of current employee contributions. The IRS allows employers offering a FSA to keep unused funds to cover the costs of administering the FSA program. Another way is to dovetail a cash crunch is to offer a HSA. All reimbursements from an HSA are limited to the current level of contributions.

Summary for employers

In summary, from an employer perspective there’s not a big financial difference between offering a FSA or HSA. At the end of the day it comes down to the preferences of employees to budget for their health care expenses. However, given HIPAA, employers can’t poke too much into the medical history of employees so it’s often best to work with a third-party provider to find out what employees would really want. Make sure to compare the cost of implementing and administering the plan in-house against the cost of outsourcing administration to a reputable provider. While the outsourcing costs may offset some of the tax breaks, those costs could help ensure that your company meets all legal requirements outlined by the IRS and other agencies.

The bottom line: Get ready for upcoming open enrollment

HR departments are gearing up for the upcoming open enrollment for FSA and HSA plans. Since the majority of companies start open enrollment in October, some will start releasing information about their plans in just a few months. Get ready by reviewing your total medical expenses for the previous year, determining whether or not a HDHP makes financial sense for your unique situation, and evaluating your current retirement strategy. While an HSA is often the better choice when you’re eligible for both plans, you can still obtain tax breaks with a FSA. No matter which option you choose, you’ll be able to increase your take home pay!

Damian Davila

Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.

Источник: https://humaninterest.com/learn/articles/fsa-vs-hsa-which-plan-is-better-for-you-and-your-company/
benefits of fsa vs hsa

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