Benefits to HSA and FSA Accounts

Jim Lowry |
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Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are designed to help you save money on medical costs by giving you access to a special savings account with tax benefits. Although these plans are very similar, they have a few differences. For instance, employees and self-employed people can both open HSA plans, while only employees can use FSA plans.

Wondering if either of these options is right for you? Take a look at some of the main benefits.

Save With Pre-Tax Contributions

Both FSA and HSA plans let you make pre-tax contributions. This means that you do not face any income tax on the amount contributed to the plan. To give you a simple example, if your taxable income is $40,000 but you contribute $2,000 to an HSA or FSA, your taxable income drops to $38,000, helping to lower your tax liability.

As of 2020, an individual can contribute up to $3,550 to an HSA1 plan and $2,750 to an FSA plan per year.

Avoid Being Caught Off Guard By a Medical Emergency

With both of these plans, you contribute some of your earnings to the account every pay period or based on a schedule you select if you are self-employed. You can use these funds to cover predictable medical expenses such as routine dental appointments or buying a new pair of glasses every year, but these accounts can also be a lifesaver if you face a medical emergency.

With an HSA, you can actually roll unused dollars into the next year, helping you build an even bigger cushion. In contrast, with an FSA, you cannot roll your unused amounts into the following year, but you do get access to your entire projected annual contribution at the beginning of the year.

To explain, imagine you plan to put $2,000 in your FSA over the course of the year and you set up the contributions to come out of your paycheck automatically. Well, you can start using the $2,000 immediately at the beginning of the year, even before you've made all the necessary contributions. Note, however, if you leave your employer and you've spent more than you've contributed, you will need to pay the funds back.

Cover a Variety of Medical Expenses

Both FSA and HSA plans let you use the funds for a wide range of medical expenses. You can cover copays, deductibles, prescriptions including insulin, and certain medical equipment. If you already know that you tend to spend a certain amount on healthcare expenses every year, these plans allow you to set aside those funds and avoid paying income tax on them.

These plans can be useful for people who have high deductibles on their health insurance, and in fact, you can only open an HSA if you have a high deductible plan. However, because you can use the funds for so many different types of medical expenses, an FSA can be an appealing way to cover medical expenses regardless of your deductible.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Sources

1. https://www.patriotsoftware.com/blog/payroll/fsa-vs-hsa-what-s-the-difference/#:~:text=Flexible%20spending%20accounts%20(FSAs)%20and,account%2C%20lowering%20their%20taxable%20income.

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