Something a little different when it comes to safety. As we approach insurance time here are a couple thoughts on the matter:
In this world of high-deductible, Silver and Gold, and all the other seemingly unintelligible healthcare options, lies the opportunity to create tax deductions for today and possibly retirement savings for tomorrow. These options come not from the plans themselves, but from the Health Savings Account (HSA) or Flexible Spending Account (FSA) options allowed with the plans. These plans seem similar on the surface, however, they act very different in practice and understanding those differences can help you to determine the right healthcare plan for you.
HSA and FSA plans are both accounts funded with pre-tax dollars, are both used for medical expenses, and are both funded through payroll deductions. This is, however, where the similarities end. And understanding the differences will help you to determine which plan is best for your situation.
HSA plans are controlled by the employee. Up to $3,350 can be contributed for an individual or $6,750 for a family. The money contributed must be used for medical costs, however, no one will be checking the usage. So if you accidentally use your HSA card to pay for a TV, no one is looking over your shoulder to ensure it was an appropriate, deductible expense. If you are audited, however, there will be a hefty fine (10% penalty plus ordinary income on the amount improperly spent) and applicable interest. You also can only use what is in the account. So if you plan to contribute $200 per month to your HSA and have a medical expense in February that costs $1,000, you will only be able to use the $400 in the account. The rest will have to come from other sources, and as the HSA balance grows, you can reimburse yourself. On the other hand, if you have money left in your HSA at the end of the year, it will rollover to the next. These rollovers never expire and can continue to grow through investments tax-deferred or tax-free.
FSA plans, conversely, are controlled by the employer. They set a maximum limit of $2,550 and the employer can lower that limit. Unlike the HSA, any expenses must be approved by the employer, so receipts must be submitted to receive a reimbursement or a payment for medical costs. Additionally, any funds left over at the end of the year could be lost. The employer is allowed to offer one of three options: either keep the remaining funds, offer a maximum of $500 to rollover, or allow a two-and-a month grace period. So if you contribute the maximum and don’t use it, you might simply lose it at year-end. But, the funds are made available from the first of the year in full, whether you have contributed to it or not. So if you contribute $200 per month to your FSA and have a $1,000 expense in February, it will be fully covered by the FSA, even though you have only contributed $400. If you then leave the employer in March, having only contributed $600 to the FSA, you are not responsible to reimburse the company the extra $400 which was paid on your behalf.
HSAs allow for far more flexibility and long-term savings potential. Many investors use them as a way to save for retirement, as they are the only triple-tax free investment option available in this manner. When first establishing the HSA, however, it can be difficult to keep track of reimbursements, and there is more of a need to be self-conscious of what is and is not deductible. The FSA is a great option if you know you will have a large expense early in the year, if you are unsure if you will be remaining with an employer, or if you do not necessarily want to keep track of your receipts and write-offs.
Either way, FSA or HSA will be a great option for paying for medical expenses with tax-deductible dollars. And everyone loves to lower their tax burden.