You don’t have to be Shakespeare to maximize this employer healthcare spending benefit.
In 2024 (and beyond), I am on a mission to make sure my fellow employed or soon-to-be employed counterparts are making the most of their employer benefits. Today, we’re talking about healthcare spending, specifically about the nuances of Health Savings Accounts (HSAs) and Flexible Spending Arrangement (FSAs). Like most investment advice, these are not “one size fits all,” contrary to what you may see on social media from the flood of “influencers.” Is that weird to make a blanketed statement about recommendations not being blanketed? Back on topic, I will highlight some key points to help you consider which type of account would best suit your healthcare spending needs, while also saving some valuable dollars on taxes!
HSAs and FSAs are pre-tax savings vehicles for healthcare expenses.
When you contribute to these types of accounts from your paycheck, it doesn’t count as taxable income for that year. Both types of accounts cover a variety of expenses and common everyday needs. HSAs and FSAs can be a great way to save on taxes and cover expenses you would be paying anyway. Even if you are in the lowest tax bracket, that would result in a 10% savings!
As an added bonus, many employers provide a match contribution for employees who participate in the HSA or FSA programs! Who doesn’t want free money?! The 2023 HSA Study by the Plan Sponsor Council of America found three-quarters of employers make contributions to HSAs across the country.
You may be wondering, “Where do I start when it comes to HSAs and FSAs?”
The absolute first thing is to determine if you are eligible to participate in an HSA or FSA. Health Savings Accounts require the following to be eligible to contribute:
- You must participate in a High-Deductible Health plan;
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- For more information about current high deductible plan qualifications, you can follow this link: What are HSA-eligible plans? | HealthCare.gov
- You must have no other health coverage;
- You must not be enrolled in Medicare;
- You cannot be claimed as a dependent on someone else’s tax return
Flexible Spending Arrangements are more flexible—pun intended– in their requirements. You can have access to this if you participate in your healthcare plan at work and currently do not participate in a Health Savings Account. However, if you are participating in an HSA, you could potentially contribute to a limited-purpose FSA for dental & vision care only. Also there are dependent care FSAs for parents, and you can read more about that in my previous New Parent Finance blog post.
Now that you have determined if you are eligible to participate in either of these plans, let’s see which one could be best for you!
As a data nerd over here, I recommend that you calculate your medical expenses from the prior year. Thanks to modern innovations like “MyChart” or the electronic service your medical provider uses, you should be able to access invoices easily. Determine what an appropriate estimate for annual medical expenses looks like for you. FSAs and HSAs have annual caps on what you can contribute. In 2024, FSAs are capped at $3,200 per year per participant, and HSAs are capped at $4,150 for self-only plans and $8,300 for family plans. Eligible employees over 55 years old can make an additional catch-up contribution of $1,000 for HSAs only.
The key nuance with Flexible Spending Arrangements and Health Savings Accounts is that Flexible Spending Arrangements have a “use it or lose it” deadline and must be spent in the tax year you contribute to them.
Have you ever seen a friend or family member make a mad dash at the end of the year to spend their FSA funds? That deadline is the reason why you probably saw them book last-minute doctor’s appointments or get some extra prescription glasses. However, with Health Savings Accounts, you can use it for both current expenses and save for future expenses. The balances in Health Savings Accounts can be held as long as you would like to have the funds in them. I’ve even used them as part of retirement planning for clients. The funds in an HSA can be invested in the menu of options your employer provides.
A Health Savings Account can be ideal if you and your dependents have low current medical expenses, infrequent doctor visits, or wish to save for future medical costs. Additionally if you’re a high-earner and are in a high-deductible plan, the tax savings can also make the HSA an even more worthwhile option for you.
The Flexible Spending Account can be suitable idea if you are eligible, have good grasp on your medical expenses for the year, and know you will use the funds within the year you contribute. The tax savings are icing on the cake for you as well!
There are calculators to help you find an option to fit your lifestyle and determine contribution amounts.
You can reference these two calculators: Flexible Spending Arrangement Calculator and the Health Savings Account Calculator.
Don’t forget to mention your healthcare savings when reviewing with your financial advisor as well! We love helping our clients determine which one is best to protect and grow their financial plans!
July 2024
