1. What is a Flexible Spending Account (FSA)?
An FSA is an employer-sponsored plan that allows to deduct dollars from your paycheck and deposit them into a special account that’s protected from taxes. FSA accounts are exempt from federal taxes, Social Security (FICA) taxes and, in most cases, state income taxes. The money in an FSA can be used for eligible health and/or dependent care expenses that are incurred while you are participating in the plan.
2. When does my FSA become effective?
Your FSA becomes effective on the date you enroll. Unlike other plans, an FSA does not start on your hire date. Contributions to your account begin as soon as administratively possible after you enroll.
3. How do I participate in an FSA?
To participate, you must enroll within 31 days of your date of hire, or elect to participate during annual Open Enrollment. If you have a life event change (for example, birth or adoption of a child), then you may be able to enroll without waiting for annual Open Enrollment, if you enroll within 31 days of the change.
4. Who can put money in my FSA?
You and your employer, although employers rarely contribute to employees’ FSAs.
5. What does it mean to incur expenses?
The IRS considers expenses to be "incurred" at the time you receive medical care or dependent care--not when you are formally billed or actually pay for services. Only eligible expenses you incur within the plan year, including any employer-allowed grace period, are eligible for reimbursement.
6. Who qualifies as an eligible dependent?
An eligible dependent is any dependent for which an employee pays a provider to care for him/her while they are at work or looking for work. The dependent must be under the age of 13 or incapable of taking care of themselves, and live in the employee’s home for more than half of the year.
7. How often can I request reimbursements?
Reimbursements can be requested as often as qualified expense are incurred. Expenses must be incurred during the plan year and the reimbursement must be requested before the end of the run-out period (or grace period if applicable).
8. What happens if I have money remaining in my account at the end of the year?
On October 31, 2013, the U.S. Department of Treasury changed the policy on remaining funds in FSA’s. You are now able to roll over remaining funds into your next plan year up to $500.00. This rollover means enrollment in an FSA is much less risky. This gives you more flexibility to spend your FSA money when you need it. You can use it for necessary out-of-pocket healthcare expenses, rather than feeling pressured to engage in last minute and potentially unnecessary spending at the end of the year or grace period.
9. Can I change my election or stop contributing money to my FSA at any time during the plan year?
Federal regulations state that once you have enrolled in an FSA, you cannot change your election amount unless you have a qualifying life event. Your employer can give you a list of permitted change events.
10. How much will I really save in taxes by contributing to an FSA?
Generally, contributions you make to your FSA are not subject to federal or social security taxes. In most instances, there are no state taxes taken out either. The amount you may save depends upon:
Let's say you want $2,000 taken out of your paycheck this year to put into your FSA. The money you direct to your FSA is taken out of your check before taxes are taken out. That reduces your taxable income by $2,000.
Let's say you normally pay 30 percent in federal, social security and state taxes on your income. In this example, you would enjoy a tax savings of 30 percent of the $2,000. In other words, you could get a $600 tax savings on the $2,000 you directed to your FSA. Plus the new rollover feature assures that any unused balance of up to $500 will still be there for you in the next plan year.
11. What type of flexible spending plans are there?
Health Care FSA: Covers medical, prescription, dental and vision expenses.
Dependent Care FSA: Covers dependent care expenses including daycare, nursery school and day camp for children, and services for adult dependents who cannot care for themselves
Limited Health Care FSA: Covers dental and vision expenses only (for compliance with a health savings account)
1. What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a special tax-advantaged savings account similar to a traditional Individual Retirement Account (IRA) but designated for medical expenses. An HSA allows you to pay for current eligible health care expenses and save for future qualified medical and retiree health care expenses on a tax-favored basis.
HSAs provide triple-tax advantages: contributions, investment earnings, and qualified distributions all are exempt from federal income tax, FICA (Social Security and Medicare) tax and state income taxes (for most states).
Unused HSA dollars roll over from year to year, making HSAs a convenient and easy way to save and invest for future medical expenses. You own your HSA at all times and can take it with you when you change medical plans, change jobs or retire.
Funds in the account not needed for near-term expenses may be able to be invested, providing the opportunity for funds to grow. Investment options include money market accounts, mutual funds, etc. Check with your bank to find out your options.
To be eligible to set up an HSA and to make contributions, you must be covered by a qualified “high-deductible health plan”, or HDHP.
2. How does an HSA work?
HSAs work in conjunction with an HDHP. All the money you (or your employer) deposit into your HSA up to the maximum annual contribution limit is 100% tax-deductible from federal income tax, FICA (Social Security and Medicare) tax, and in most states, state income tax. This makes HSA dollars tax-free. You can use these tax-free dollars to pay for expenses not covered under your HDHP until you have met your deductible.
The insurance company pays covered medical expenses above your deductible, except for any coinsurance; you can pay coinsurance costs with tax-free money from your HSA. In addition, you can use your HSA tax-free dollars to pay for qualified medical expenses not covered by the HDHP, such as dental, vision and alternative medicines.
Tax-free contributions to your HSA can be made in a variety of ways, including:
Distributions from your HSA are used to pay for qualified medical expenses.
This can be done by the following methods:
How It Works
Your Health Savings Account allows you to save pre-tax income that you can use to pay for qualified short- and long-term medical expenses. It complements your High-Deductible Health Plan, giving you an additional method to save specifically for healthcare costs.
3. Who can have an HSA?
You must be:
Exceptions: Other health insurance does not include coverage for the following: accidents, dental care, disability, long-term care, and vision care. Workers’ compensation, specified disease, and fixed indemnity coverage is permitted.
4. How much can I contribute to my HSA for 2019?
For 2019, the maximum contribution for an eligible individual with self-only coverage is $3,500 and the maximum contribution for an eligible individual with family coverage is $7,000. Individuals who are eligible individuals on the first day of the last month of the taxable year (December for most taxpayers) are allowed the full annual contribution (plus catch up contribution, if 55 or older by year end), regardless of the number of months the individual was an eligible individual in the year.
* Catch-up contributions are allowed for those greater than 55 years of age ($1,000 in 2019). Catch-up contributions can be made at any time during the year in which the HSA participant turns 55.
For more detailed information on HSAs and taxes, visit the U.S. Department of Treasury website at www.ustreas.gov or talk with your tax advisor.
5. What is a high-deductible health plan (HDHP)?
With a high-deductible health plan, you have the security of comprehensive health care coverage. Like a traditional plan, you are responsible for paying for your qualified medical expenses up to the in-network deductible; however, the deductible will be higher, and you can use HSA funds to pay for these expenses.
After the annual deductible is met, you are responsible only for a portion of your medical expenses through coinsurance or co-payments, just as with a traditional health plan. For 2019, the minimum HDHP deductible by law is $1,350 for individuals and $2,700 for families.
For 2019, the maximum out-of-pocket expenses by law (including deductible and co-payments, but not including premiums) cannot exceed $6,750 for individuals and $13,500 for families.
The deductible and maximum out-of-pocket expenses are indexed annually for inflation by the IRS and US Department of Treasury.
6. How do I know if my health plan is a "qualifying (or qualified)” high-deductible health plan (HDHP)?
The health insurer or your employer can verify the status of your coverage. In addition, the words "qualifying (or qualified) high-deductible health plan" or a reference to IRC (Internal Revenue Code) Section 223 will be included in the declaration page of your policy or in another official communication from the insurance company. A HDHP is a health insurance plan that generally doesn't pay for the first several thousand dollars of health care expenses (i.e., your "deductible") but will generally cover you after that.
It is important when selecting your HDHP that your insurance carrier verify and guarantee that the HDHP meets IRS regulations to ensure your HSA is qualified.
7. How do HSAs differ from health care flexible spending accounts (FSAs)?
Both HSAs and FSAs allow you to pay for qualified medical expenses with pre-tax dollars. One key difference, however, is that HSA balances can roll over from year to year, while FSA money left unspent at the end of the year is limited to a $500 carryover to the immediately following plan year OR a grace period. You may choose to use a Limited Purpose FSA to pay for eligible heath care expenses and save your HSA dollars for future health care needs. You may use Limited Purpose FSA dollars to reimburse yourself for expenses not covered by your high-deductible health plan, such as:
All three forms of contributions are exempt from federal income taxes. Employer and salary reduction contributions (section 125 cafeteria plan) are exempt from FICA and FUTA as well.
9. Why is my employer offering an HSA in conjunction with a qualified HDHP?
Offering an HSA is an excellent way to help you save for future medical expenses and pay for current expenses with tremendous tax advantages.
10. May I have more than one HSA?
Yes, you may have more than one HSA and you may contribute to them all, as long as you are currently enrolled in an HDHP. However, this does not give you any additional tax advantages, as the total contributions to your accounts cannot exceed the annual maximum contribution limit. Contributions from your employer, family members, or any other person must be included in the total.
11. Can I get an HSA even if I have other insurance that pays medical bills?
You’re only allowed to have auto, dental, vision, disability and long-term care insurance at the same time as an HDHP. You may also have coverage for a specific disease or illness as long as it pays a specific dollar amount when the policy is triggered.
12. Can my HSA be used to pay premiums?
No, this would be a nonmedical withdrawal, subject to taxes and penalty.
Exceptions. No penalty or taxes will apply if the money is withdrawn to pay premiums for:
13. Can I use the money in my HSA to pay for medical care for a family member?
Generally, yes. Qualified medical expenses include unreimbursed medical expenses of the accountholder, his or her spouse, or dependents.
14. What is a qualified medical expense?
A qualified medical expense is one for medical care as defined by Internal Revenue Code Section 213(d). The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision. Most expenses for medical care will fall under IRC Section 213(d).
However, some expenses do not qualify. A few examples are:
HSA money cannot generally be used to pay your insurance premiums.
* See IRS Publications 502 (“Medical and Dental Expenses”) and 969 (“Health Savings Accounts and Other Tax-Favored Health Plans”) for more information.
15. What happens to my HSA if I quit my job or otherwise leave my employer?
Your HSA is portable. This means that you can take your HSA with you when you leave and continue to use the funds you have accumulated. Funds left in your account continue to grow tax-free. If you are covered by a qualified HDHP you can even continue to make tax-free contributions to your HSA.
Distributions from your HSA used exclusively to pay for qualified expenses for you, your spouse, or dependents are excluded from your gross income. Your HSA funds can be used for qualified expenses even if you are not currently eligible to make contributions to your HSA.
16. How and when can money be taken out of an HSA?
Account holders may make a withdrawal (also known as a distribution) at any time. Distributions received for qualified medical expenses not covered by the high deductible health plan are distributed tax-free. Distributions can be requested via your online account.
Unless individuals are disabled, age 65 or older, or die during the year, they must pay income taxes plus an additional percentage (determined by the IRS) on any amount not used for qualified medical expenses. Individuals who are disabled or reach age 65 can receive non-medical distributions without penalty but must report the distribution as taxable income.
17. How are distributions from my HSA taxed after I am no longer eligible to contribute?
If you are no longer eligible to contribute because you are enrolled in Medicare benefits, or are no longer covered by a qualified HDHP, distributions used exclusively to pay for qualified medical expenses continue to be free from federal taxes and state tax (for most states) and excluded from your gross income.
18. What happens to the money in my HSA after I reach age 65?
At age 65 and older, your funds continue to be available without federal taxes or state tax (for most states) for qualified medical expenses; for instance, you may use your HSA to pay certain insurance premiums, such as Medicare Parts A and B, Medicare HMO, or your share of retiree medical coverage offered by a former employer. Funds cannot be used tax-free to purchase Medigap or Medicare supplemental policies.
If you use your funds for qualified medical expenses, the distributions from your account remain tax-free. If you use the monies for non-qualified expenses, the distribution becomes taxable, but exempt from the 20 percent penalty. With enrollment in Medicare, you are no longer eligible to contribute to your HSA. If you reach age 65 or become disabled, you may still contribute to your HSA if you have not enrolled in Medicare.