As far as I can tell, none of the versions of tax reform
introduced recently in Congress propose to make any changes to a couple of very
useful tools for saving money to pay for medical expenses, and that is a very
good thing. By following a few simple
rules it is possible to save, invest, and
spend thousands of dollars tax-free for your health care expenses.
A medical Flexible Spending Account (FSA) allows an employee
to have as much as $2550 deducted pre-tax (i.e. it is not taxed before it goes
into the account) from his earnings each year to pay for medical bills not
covered by his insurance. It may be spent
to cover such costs as co-pays and deductibles for doctor visits and
prescriptions; dental exams; eyeglasses and contacts; even over-the-counter
drugs that a physician prescribes. When
the money is withdrawn and spent on qualified medical expenses, it is not taxed
then, either.
The catch is that the FSA is a use-it-or-lose-it account. If
the owner doesn’t incur enough expenses to drain the account in the 12-month
period, he will forfeit what he hasn’t spent.
(Some plans will allow the account owner to carry over as much as $500
to the next year.) So anyone funding an
FSA should carefully estimate his annual expenses when deciding how much to deposit. One other benefit of the FSA: it is pre-funded. For example, if a worker is having $100
withheld each of the 24 paychecks in a calendar year, the entire $2400 is
available to him on day one, before he has actually deposited the money into
the account.
Ironically, a Health Savings Account (HSA) offers a bit more
flexibility and some better benefits than an FSA but comes with some more
stringent rules for qualifying to own one.
First, the HSA is only available to people who are covered
by a high-deductible health insurance plan. “High” is currently defined as a minimum $1300
deductible for an individual plan, with a maximum combined deductible/out-of-pocket
limit of $6550. It’s $2600/$13,000 for a
family plan. As with an FSA,
contributions may be made by the owner via payroll deduction and are
pre-tax. And again, if spent on
qualified medical expenses, the tax man never touches that money.
Unfortunately, the HSA is not pre-funded. The owner can only spend what is actually on deposit. On the other
hand, the contribution limits are higher: $3400 for an individual, $6750 for a
family. And unlike the FSA, money in an
HSA can roll over year-to-year and is available to cover any qualified expense
incurred after the account was opened.
So if someone had some big expenses early in the year and had to pay
with cash or credit card, he can reimburse himself later when the account
balance grows large enough.
The account can even follow the owner into retirement. Being on Medicare disqualifies a person from
contributing further to an HSA, but any money saved while qualified still
belongs to the owner to offset future medical bills.
If you anticipate spending anything on medical or dental care over the course of a year, you
should at least fund an FSA if your employer offers it. But if you employer offers a health insurance
plan that qualifies as high-deductible, give some thought to choosing that and
opening an HSA.
Next week we will examine who can benefit most from funding
an HSA and maybe run through a couple of hypothetical situations.
Until next week,
Roger
“Ants don’t have leaders, but they store up food during harvest season.” Proverbs 6:7, 8 (CEV)
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