All I wanted to do was choose the right health insurance. It’s all confusing, and I found myself in a state of “benefits overload.” I know I am not alone because my office and the advisors I work with receive calls all the time from clients asking for advice on company health insurance programs.
Health insurance confusion is the main culprit, and in financial planning, we feel that benefits and planning go hand in hand. The confusion about benefits can cost Americans money every day and prevent them from getting the kind of services they need.
Some of my clients opt for the most costly coverage because they think it is more comprehensive, and they may not even be utilizing all the services. Others choose nothing and go without coverage because they are just overwhelmed with the differences and the sheer number of choices.
One of the questions I receive the most is about Health Savings Accounts (HSA) and Flexible Spending Program (FSA). Since I need to research these plans again this year for myself, I thought I would school you up too.
Self-Employed vs. Employee Options
One difference is self-employed individuals cannot open an FSA. I inform entrepreneurs that they cannot open an FSA as a self-employed individual but can open an HSA. The HSA option comes with a high deductible health insurance plan, and that deductible also has limits that have to be met and out-of-pocket expenses requirements. An employer must open an FSA, and the employees can contribute. With a FSA plan, the employee does not have to worry about having a high deducti
One HUGE difference I want to make between HSA and FSA is employees, not employers, own HSAs. However, employers own FSAs, so the unused funds belong to the employer, not the employee. If you don’t use the funds in your FSA, the employer gets the money. Some plans may allow you to carry over a small amount if the money remains unused though while some plans also allow a grace period to use the money after the year ends.
Which brings up another common question – what if I leave my employer? If you are in an HSA plan, you can take those funds with you to your new employer’s plan or leave the funds with the provider and use them. If you are in an FSA plan, in the year you make the contribution, the unused funds go to the employer unless you are eligible for COBRA, but the trick is the FSA funds can’t be used to pay COBRA. Also, you only have 90 days to use or lose those dollars.
Annual Contribution Caps
For 2021, employees can contribute up to $2,750 per year in an FSA, while an HSA allows for $3,600 if you have self-only health insurance and $7,200 if you have family coverage. Those 55 and older can contribute a little more, but those individuals probably aren’t reading the Millennial Message so let’s move on.
How Can Funds Be Spent
If you wonder how the two plans differ in what the funds can be spent on, no worries because the eligible qualifying medical expenses are the same: Co-pays, deductibles, prescriptions, and medical equipment.
With an HSA, money can be withdrawn for any purpose. However, if the withdrawal is for anything other than a qualifying medical expense, then a 20% penalty in addition to income taxes is owed. After age 65, you can withdraw money for any purpose without penalty and only pay income taxes.
How the Plans Work
There are three super cool points to having each of the health insurance plans, whichever plan you are eligible for:
- An FSA allows immediate access to ALL the money you plan to contribute in a year regardless if you have contributed it yet, unlike an HSA where you only have access to what has been deposited into the account.
- Both plans make it easy to access the funds. With an FSA, you file for the reimbursement, and account holders do not need to report FSA contributions on any tax forms. With an HSA, you have a debit card in some cases, but you must file distributions on IRS Form 8889.
- FSA participants can change their contributions with life events, and HSA holders can change it almost any time. Whichever it is that you qualify for, you can benefit from tax reductions.
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Contributions can be invested with an HSA. Whereas, FSA money cannot be invested.
Don’t be afraid of asking lots of questions to your Human Resource professional or tax advisor and getting the bottom of your benefits! It will pay off!
May 2021
Content in this material is for general information only and not intended to provide specific investment, tax, or legal advice or recommendations for any individual.
