Dear Readers: Fall is in the air and that means three important things: summer vacation is over, the kids are back in school, and it’s open enrollment for most employer health care offerings. While you may have mixed feelings about the first two, the opportunity that open enrollment offers you to plan for health care costs while saving on taxes is nothing but positive to me. So if you’re lucky enough to have an employer that provides a health savings account, a flexible spending account — or both — I recommend looking into them at the first opportunity. Here’s why:
The Plus Side of Both HSAs and FSAs
Whether you’re young and single, have a growing family or are approaching retirement, health care costs are a fact of life. The beauty of either a health savings account or a flexible spending account is that each account not only helps you plan and save to cover these inevitable costs, each gives you a tax break for doing it.
Contributions to an HSA or FSA are tax-deductible from your gross income. Plus, each account allows you to make tax-free withdrawals for qualified out-of-pocket medical expenses, including deductibles, copayments, prescriptions, necessary medical equipment, etc. You can also use the funds for medical care not covered by insurance, such as dental, vision and hearing.
Another potential plus is that both accounts allow employers to make contributions on your behalf. This isn’t required, but would certainly serve as an incentive to participate. Make sure to inquire.
Finally, once you elect to participate in either type of account, your contribution is automatically deducted from your paycheck and deposited into your account. Similar to a 401(k) contribution, it’s all done for you.
However, if you have a choice — and not all employers offer both an HSA and an FSA — there are significant differences between the two that could make one better for you than the other.
The HSA Difference: You Need a High Deductible Insurance Policy
To be eligible for an HSA:
–You have to have a high deductible insurance policy. For 2015, the minimum deductible is $1,300 for an individual, $2,600 for a family.
–You can’t be enrolled in Medicare.
–You can’t be claimed as a dependent on someone else’s tax return.
If you’re eligible, there are several good reasons to consider an HSA. Annual contribution limits are pretty high: $3,350 for an individual, $6,650 for a family. Those who are 55 or older can add an extra $1,000. There’s no timeline for using the funds. They carry over year to year. And an HSA is portable — if you change employers, you can take it with you. Or if you stop working all together, the money is yours.
If you’re lucky enough not to need the money you contribute for medical expenses, it has the opportunity to grow, tax-deferred — just like in an IRA (and some plans also let you invest your proceeds). At 65, you can withdraw the funds for non-medical reasons without penalty (there’s a 10 percent penalty if you’re under 65) — however you’ll pay income taxes on the withdrawal, which is again similar to an IRA. Of course, there is no tax and no penalty at any age as long as you use the money for qualified medical expenses.
If your employer offers an HSA and you’re eligible, I’d say go for it and max out your contributions. Even if an employer doesn’t offer one, an eligible individual can open an HSA separately and enjoy the benefits.
The FSA Difference: You Have to Use It or You May Lose It
There are no special eligibility requirements for an FSA, and it offers the added advantage of not being subject to payroll taxes, but there are a couple of features that you need to be aware of before signing up:
–Annual contributions are capped at $2,550, AND you have to designate how much you’re going to contribute during open enrollment. This amount can only be revised if your family or employment changes.
–If you don’t use the total amount contributed in a calendar year, you may lose it. New rules allow an employer to let you carry over $500 or give you an extra two and a half months to use the funds, but this isn’t a requirement.
–You can’t take an FSA with you if you leave your job. While you generally have until the last day of your last month of employment to spend the money (longer to make a claim), any unused funds have to be forfeited.
This all means that you have to plan your contributions wisely. You don’t want to be caught at the end of the year frantically buying extra glasses just to use up the money.
If your employer offers an FSA, also ask about an FSA for dependent care. This is a separate account with an annual contribution cap of $2,500 for singles or $5,000 for married couples — a possible boost for working parents.
Bottom Line: Don’t Ignore Open Enrollment
As tempting as it may be to ignore the open enrollment information that comes across your desk, I encourage you to consider it carefully. It can be a real plus for your financial health and well-being.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at askcarrie@schwab.com.