Life Stages Planning

HEALTHCARE

Deciding the right plan for you, your marriage, and/or your family can be tough. A flexible spending account (FSA) option allows someone to set aside money to pay for out-of-pocket medical expenses—and this money is not taxed, allowing for savings equaling the amount that would normally be taxed. Also gaining popularity in recent years is the health savings account (HSA) option—which can be a great way to not only pay for medical expenses, but also help save for retirement.

  Flexible Spending Account (FSA)  

REQUIREMENTS:

  • Typically, you must be an employee of an employer that offers an FSA.

  • Unlike an HSA you do not have to be covered under a high deductible health plan (HDHP). You may even have multiple coverages.
     

CONTRIBUTION LIMIT:

  • As of 2019 the annual contribution limit to an FSA is $2,700.

  • Employer contributions are not typically counted towards the $2,700 limit.

    • One exception is if the employer contribution is a result of an employee’s use of cafeteria plan flex credits that an employee could have decided to take as taxable wages.

      • Cafeteria plan flex credits are given to employees to purchase benefits of their choosing.  Employees can receive 80% of any unused money (credits) as taxable wages.

  • Employer contributions cannot exceed employee-salary reduction contribution unless the employee contributes less than $500. In that case the employer may contributed a maximum of $500.
     

SUMMARY OF ADVANTAGES:

  • Contributions are taken on a pre-tax basis therefore lowering taxable income.

    • This reduction in income could allow an employee to be eligible for additional tax benefits that they would not have been eligible for prior to the contribution.

  • Employees can be reimbursed with pretax dollars: An employee must decide at the beginning of the year how much they would like to contribute to their FSA. The total amount is then broken into installments that are taken out of each check for the entire year.

    • As an employee incurs qualified medical expenses they can either use a debit card given to them (easiest method) or send receipts to provider which writes them a check for that amount.

    • For example, an employee elects to contribute the full $2,700 ($225/month) and has medical expenses of $500 within the first month.

      • They would send in their receipt or use their debit card and be reimbursed for that $500 even though they haven’t contributed the full $500 yet.

  • Allows employees to get tax break for medical expenses: For many employees an FSA can be one of the only ways to get a tax break for medical expenses.

    • As of 2019 taxpayers are only allowed to deduct medical expenses that exceed 10% of their AGI.
       

SUMMARY OF DISADVANTAGES:

There is one big catch that disincentives many employees from participating in their company’s FSA and that is “either use it or lose it”.

  • Any funds left over at years end are forfeited.

    • Many employers have provisions that can help in these situations, the two most popular are:

      • Letting employee’s rollover up to $500 to the following year’s health expenses.

      • Give an additional grace period for an employee to exhaust all funds from the previous year.

      • It is important to note that these provisions are not required and vary by employer. Employees must speak with their HR department to determine if these or any provisions are available.

 

QUALIFIED EXPENSES:

  • Copayments

  • Coinsurance

  • Deductibles

  • Prescription medications

  • Dental Care

  • Vision care

  • Medical equipment & treatments

NON-QUALIFIED EXPENSES:

  • Insurance premiums

  • Over the counter medication

  • Vitamins

  • Cosmetic procedures

  • Health club memberships

  FSA: Dependent Care Option  

Like a health care FSA in which pre-tax dollars are used, dependent FSAs allow employees to pay for eligible dependent care services such as:

  • Preschool

  • Summer day camp

  • Before or after school programs

  • Daycare

  • This applies to employees who have children under the age of 13 or children, spouses or relatives that have physical or mental disabilities that make them incapable of taking care of themselves. They must also live in the same home as the employee.
     

Contribution limit: In 2019 the contribution limit for single employees is $2,500 and for married couples $5,000.

  • This plan as similar advantages/disadvantages to a health care FSA, for example, funds left over at the end of the year are forfeited.

  • Childcare cost is typically more accurately estimated which could reduce the risk of having too much money left over at the end of the year.
     

Tax consequences:

Employees that contribute to a dependent care FSA cannot take advantage of the child tax credit unless expenses exceed the $5,000 threshold.

  • Employees with a marginal tax rate of over 15% may benefit more from a dependent FSA rather than claiming the child care tax credit.

  FSA: Limited Option  

These are very similar to a typical health FSA subject to the same contribution limits and have the same advantages/disadvantages.

  • The one difference is that these can only be used for dental and vision expenses.
     

Employees that typically contribute to an FSA also have an HSA.

  • Restrictions on HSA don’t allow employees to have both an HSA and a health FSA, limited FSAs are a way to compliment your HSA.
     

Funds can only be used for qualified dental and vision expenses after employees meet their health insurance deductible.

  Health Savings Account (HSA)  

Earnings on invested assets within this plan are not subject to tax and distributions are tax-free is used for qualified medical expenses. Distributions taken for reasons other than medical expenses are subject to income tax and an additional penalty of 20% if taken before the age of 65. For individuals taking distributions after the age of 65 the money is still subject to income tax, but it is not subject to the 20% penalty.
 

WHO QUALIFIES?

  • One of the major drawbacks of HSA’s is that individuals must be enrolled in a high deductible health plan (HDHP) to qualify. For 2019 a HDHP is described as a health plan in which the deductible for an individual is at least $1,350 or $2,700 for a family, and out-of-pocket maximum cost are $6,750 (individual) or $13,500 (family). It is important to note that these amounts are subject to change in future years, so it is important to keep up-to-date on these minimums and maximums.

  • It is also important to note that married individuals will not be eligible if they covered under any other health plan that is a non-HDHP plan. A spouse’s non-HDHP or FSA plan will make them ineligible.

  • An individual enrolled in Medicare does not qualify to contribute to an HSA plan (because it is not a HDHP), but they are able to withdraw funds for medical expenses from an existing HSA.
     

CONTRIBUTION LIMITS (2019)

  • An individual can contribute up to $3,500 per year for a full tax deduction, while people who have family plans are able to contribute up to $7,000.

  • A person that is 55 years of age or older can contribute up to $1,000 more per year which is considered a catch-up contribution.

  • Contributions by an employer also count towards these limits, so it is important to make sure that the total contribution to any HSA plan does not exceed the IRS-set limit.

  • What happens if you contribute too much?

  • If an someone notices that they have contributed too much within a given year they can:

  •  Sell their excess contribution as well as any gains on those contributions before the tax deadline date and incur income taxes.

  • Keep the excess in the HSA and carry it to the next year which will make them incur a 6% penalty per year until the HSA is no longer considered overfunded.
     

QUALIFIED MEDICAL EXPENSES

  • Medical expenses for the individual and any dependents that are not reimbursed by health insurance policy

  • COBRA health insurance premiums

  • Long-term care premiums

  • Health insurance premiums if they are receiving unemployment compensation.
     

NON-QUALIFIED EXPENSES

  • Cosmetic surgery

  • Health club fees

  • Illegal operations or procedures

  • Maternity Clothes

  • Cosmetics such as toothpaste
     

SUMMARY OF ADVANTAGES

  • Contributions can be made by others: Contributions can be made by employers, relatives or anyone else that wants to add to your HSA.

  • Pre-tax contributions: Contributions are tax deductible, therefore lowering overall taxable income for a given year.

  • Tax-free withdrawals: Withdrawals from an HSA are tax-free if used for qualified medical expenses

  • Earnings are tax free: Similarly, to an IRA or 401(k) earning from investments held in an HSA grow tax-free.

  • Funds rollover: Funds not withdrawn in a given tax year are rolled over to subsequent years allowing the account to grow over time

  • Portable: An HSA belongs to the individual even if contributions have been made by an employer. This means that even if someone were to quit their job or change health insurance plans (if they keep a HDHP they will still be able to contribute) funds can still be used for qualified medical expenses.

SUMMARY OF DISADVANTAGES

  • High-deductible requirement: Although these plans usually come with low premiums it may be hard for some people to come up with the money to meet the high deductibles required.

  • Unexpected health care cost: Health care cost could exceed the amount saved in an HSA.

  • Pressure to save: With the focus on saving people may be reluctant to use their funds in their HSA for necessary medical expenses.

  • Taxes & penalties: If someone needs to withdraw money from their HSA for any reason besides the qualified medical expenses they will have to pay taxes on that money as well as an additional 20% penalty if under the age of 65. After they reach the age of 65 taxes will still be taken, but the 20% penalty will no longer apply.

  • Record keeping: A person must provide proof that funds were used for a qualified expense, forcing them to keep good records of their expenses.

  • Fees:  Some HSAs charge a monthly fee for either maintenance or transactions, this could slowly eat away at the overall value in the account. It is important to pay attention to fees being charged because they will vary among different institutions.
     

Although HSAs have been gaining in popularity many people are still unaware of the great opportunity for saving they can provide. HSA are not the best fit for everyone but could greatly increase a person’s wealth over a lifetime and provide them with additional income in retirement. Individuals that don’t find themselves going to the doctor very often, but still need the protection against major medical cost can greatly benefit from opening an HSA.

 

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