FSAs and HSAs allow taxpayers to make tax-free contributions to pay for out-of-pocket (co-pays and deductibles) medical expenses. The monies contributed to these plans are shielded from personal income and payroll taxes (social security & Medicare). However, the payroll tax exclusion does not apply to self-employed individuals.
What are some of the differences between these two plans?
FSAs allow an employee to make a contribution of $2,650 in 2018. Employers are not required to offer FSAs . While this dollar limitation may be considered a drawback, it does help reduces taxes. One definite drawback of a FSA is the use it or lose it rule. If one does not spend all of the $2,650 in the 2018 calendar year, the unspent amount of money is lost. This forces employees to carefully estimate their out-of-pocket expenses when they sign up during the open enrollment period. Employers are permitted to allow employees until March 15 to spend unused funds or carry over $500 to the following year, but employers are not required to do so. Since the funds are available for the employee to spend effective January 1, there have been cases where an employee spent the entire amount in January shortly before leaving for a new job. Employers have reacted to this “strategy” so one must read the plan document very carefully. On the other hand, if the employee leaves his employer, the unused dollars in the FSA are lost. Thus if you think your job may be in jeopardy due to performance or downsizing, think twice before putting dollars into an FSA.
HSAs have a higher contribution limit. In 2018, an individual can contribute $3,450 and $6,900 for a family plan providing your insurance plan has a high deductible. If over age 55, these limits each increase by $1,000. If the full amount contributed to the HSA is not spent, the unused portion can be carried forward indefinitely. HSAs can be used like a 401(k) plan for those whose financial resources are sufficient that they do not need to use the HSA to pay for out-of-pocket medical expenses. To learn more about this strategy, read our blog posting dated July 5, 2016 Health Savings Account – An Alternative Strategy. Another benefit of the HSA is that if you leave your employer, you can take your HSA plan with you.
One additional difference between a FSA and a HSA – the former is for employees only, whereas the latter can be used by employees and self-employed persons.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.