Your employer may offer one or more types of health savings plans to help you pay for your out-of-pocket medical bills and prescription drugs. These allow you to set aside money tax-free to spend on out-of-pocket medical costs.
Flexible Spending Account (FSA)
The money set aside in an FSA can be used for medical expenses such as doctor visits, chiropractor fees, prescription drug copayments, dental care, and vision care not otherwise covered by your health plan. The money can also be used to pay for over-the-counter medicines, but only if your doctor writes a prescription for them.
Requirements: You can only enroll in a FSA if your employer offers one. If you're self-employed, you're not eligible.
How it works: You decide how much money you want to save for medical costs when you enroll for insurance during open enrollment. That amount is divided among all your paychecks. So on each paycheck stub, you'll see an automatic deduction for your FSA. Your employer can also contribute money into this account for you.
Amount you can save a year: Up to $2,650 in 2018. Each year, the government may adjust the maximum amount you’re allowed to save.
How it helps save money: The money you deposit into your FSA comes out of your paycheck before any taxes have been taken out. So your FSA money is tax-free. You can also make withdrawals without paying taxes as long as you spend the money on qualified medical expenses -- health care or products on an IRS-approved list.
Another way it helps: With an FSA, you can spend money that you've committed to the account before you've saved it. For instance, if you decide at the start of the benefit year to put $2,600 in your FSA, and you have a $1,000 expense in January, you can still use your FSA account to pay, even though you have not yet set aside $1,000 to the account.
Warnings: FSAs are considered “use or lose” accounts.You must spend the money you commit to the FSA during the benefit year or you'll lose it. Sometimes employers offer a grace period of 2 ½ months to give employees extra time to spend the money. Employers may also let workers carry over up to $500 of unused FSA funds to the next year. Employers can offer you either a grace period or the carryover option, but not both. Also, they are not required to offer either.
To protect yourself from losing any money:
- 1st: You need to carefully estimate how much you'll spend for health care. (You may hear this called your out-of-pocket medical costs.) That way, you're only saving as much as you think you'll use.
- 2nd: You need to stay on top of the paperwork to cover or get reimbursed for each expense. Some expenses covered by your FSA may be automatically submitted to the account, but all claims will not be automatic. You might find it helpful to learn in advance which claims are automatically submitted and which are not, and the last date that you can turn in receipts.
Health Savings Account (HSA)
A HSA is a savings account offered along with a high deductible health plan to pay for expenses not covered by your health plan, such as deductibles, co-payments, and co-insurance.
Requirements: A HSA may be offered by an employer or you may set up your own account through a bank. No matter how it is set up, you must be enrolled in a high deductible health plan in order to have an HSA. In 2018, the minimum deductible must be $1,350 for an individual or $2,700 for a family. The health plan must cap out-of-pocket expenses at $6,650 for individuals and $13,300 for families.
Amount you can save a year: You can save up to $3,450 per year as an individual or $6,900 per year as a family in 2018.. If you are over age 55, you can save an extra $1,000 per year.
Benefits: Unlike the FSA, any unused amount in your HSA rolls over from year to year, along with any interest you earned on the account. Also, unlike the HRA (below), you own the account, not your employer so you can take your account with you if you change jobs.
Warnings: Money in your HSA can be used for non-medical expenses, but you must pay income tax on the amount used, and if you are under age 65 you will pay a penalty, as well.
Health Reimbursement Arrangement (HRA)
With an HRA, your employer reimburses you for certain medical expenses up to a maximum amount for the year. Your employer may offer an HRA with other health savings plans, such as FSAs.
Requirements: Only employers can offer HRAs. If you're self-employed, you're not eligible. You are only eligible for an HRA if you are enrolled in a group health plan that is offered by your employer or former employer, in the case of a retiree.
Amount you can save a year: There is no maximum limit on how much your employer can set aside.
Benefits: Your employer entirely funds an HRA. You don't pay taxes on the amount your employer contributes. Plus, you might be able to carry the money over from one year to the next.
Warnings: As with other savings plans, you'll only be reimbursed for qualified medical expenses and if you change jobs, your employer does not have to allow you to continue using your account.
A Dependent Care Flexible Spending Account
You can use this type of savings account for a child's day care or for adult day care, such as for your spouse, parent, or grandparent.
Requirements: The dependent you want to cover must live in your home at least 8 hours a day. Children must be 12 or younger unless they have a disability.
Amount you can save a year: If you're married and file a joint tax return, single, or a head of household you can put up to $5,000 a year in this type of account. If you are married and filing separately and your spouse also contributes to a dependent care FSA, you can each save up to $2,500 a year for a total of $5,000.
Benefits: The day care can be in your home, a sitter's home, or a day care center.
Warnings: You can't claim expenses reimbursed from an FSA as part of the dependent care tax credit on your tax return.
As with an FSA account, you must use the funds during the benefit year. If you don't, you'll lose the money left in the account.