It’s that time of year you can elect your benefits through work. Your employer may offer a Health Savings Account (HSA) and/or a Flexible Spending Account (FSA). Here are some differences and how to use both.
Flexible spending accounts, if offered, are available for all employees regardless of the health insurance plan that you have. It's a “use it or lose it” account, meaning that you have to spend down your contributions usually before the end of the year or few months thereafter. The maximum FSA contributions that you can elect to make is projected to be $2,700 in 2019^1. Any amounts above $500 that have not been spent on qualified medical expenses can get delivered to the employer. Your contributions to the FSA are the most tax-advantaged because they are taken out before Social Security and Medicare.
Health savings accounts are a different animal and are only offered if you have also elected a high-deductible health care plan. These types of health care plans come with a lower premium, however, there's a high-deductible that must be met before benefits get paid. Contribution maximums for 2019 are $3,500 for individuals and $7,000 for family plans, plus $1,000 “catch-up” if you’re 55 and older^2. Unlike the FSA, your HSA contributions can be rolled over each year and invested for the long run. Contributions are tax-deductible on the way in and tax-free when spent on medical expenses at any point in the future. After the age of 65, if spent on something that's not a medical expense it would simply be taxed as ordinary income. The HSA is the most tax-advantageous account out there and it’s most effective if it’s saved until retirement, allowing for years of tax-free growth.
It's important to note that if you elect for the HSA, you'll be forced to use the limited purpose FSA, which can only be used for dental and vision. This decision depends on your health situation; if you need consistent medical attention throughout the year then a high-deductible plan may not be in your best interest and instead you should opt for a gold or silver plan that pays the higher benefit with a lower deductible. If you're anticipating a medical expense next year, then opt-in for a no deductible health care plan along with the flexible spending account to maximize your coverage and ability to pay for the expense.
If you choose between the two, only the HSA can be used in distant the future. It can be used for Medicare and long-term care premiums and sometimes massage therapy or physical therapy. If saved until retirement, that will be the time you’ll most need it.
At Eureka Wealth Management, I help my clients get the most from their workplace benefits including setting up the investment strategy for the HSA. I also calculate retirement and invest for the future. Call me at (760) 537-0791 or online at eurekawealthmanagement.com.