Reduce your healthcare costs with tax-advantaged healthcare saving accounts — known as HSAs and FSAs. These accounts can help you save on qualified out-of-pocket medical expenses and products such as:
Doctor’s office visits.
Co-pays for medical tests and procedures.
Contact lenses and items you need for your lenses (like cleaning solutions).
Durable medical equipment, such as crutches and wheelchairs.
Certain vision and dental care.
Many over-the-counter (OTC) medications and products.
You can find the full list of current qualifying medical expenses on the IRS website.
What are HSAs?
HSA stands for Health Savings Account. You are eligible for one of these accounts if you enroll in a high-deductible health plan (HDHP). What qualifies as an HDHP changes every year. You can learn more by visiting Healthcare.gov.
You are eligible whether you buy your insurance as an individual (such as through the state healthcare exchanges) or have an employer-sponsored plan.
Benefits of HSAs
According to IRS Publication 969, HSAs offer several benefits, including:
You won’t owe federal income tax on contributions to an HSA. This is applicable whether contributions come from you or your employer, and whether or not you itemize your deductions.
The interest or other earnings in an HSA are tax-free if you use the money for qualified healthcare expenses.
Your HSA withdrawals are tax-free if used for qualified healthcare expenses.
Contributions roll over from year to year. They can stay in your account until you use them. You don’t have to use the money by the end of the fiscal year.
HSAs are portable. Even if you leave your employer or the workforce, you can still keep your HSA.
Important notes about HSAs
If you use HSA money for non-qualified expenses (beauty products, for example), you will have to pay the IRS a 20% penalty plus taxes on withdrawal. Some HSA accounts require you to submit receipts to prove that you used the money for qualified medical expenses. Even if your HSA doesn’t require this, you should keep all receipts for up to three years in case of an IRS audit.
You can also use HSAs as an investment tool. According to Bankrate.com, you can use an HSAs to invest in stocks, bonds, and other financial instruments. Earnings are tax-free.
Although you won’t owe federal income tax on HSA contributions, you must report HSAs on your yearly income tax return.
What are FSAs?
FSA stands for Flexible Spending Account. Unlike HSAs, which are individual plans, FSAs are employer-established benefit plans, which means you can get one of these special healthcare spending accounts only through an employer.
FSAs allow employees to get reimbursed, or paid back, for qualified medical expenses.
You can’t use FSAs for the following:
Health insurance premiums.
Long-term care coverage or expenses.
Amounts that are covered under another health plan.
Benefits of FSAs
FSAs offer several benefits:
Your employer’s contributions can be excluded from your gross income.
Reimbursements are tax-free if you pay for qualified medical expenses for you and qualifying family members.
You can use an FSA to pay for qualified medical expenses even if you haven’t funded the account yet.
You don’t pay federal income tax, social security, or Medicare on the money that you or your employer contributes to the FSA.
Important notes about FSAs
You lose any funds you don’t use by your employer’s claim deadline. They can’t be rolled over. FSAs aren’t portable—they don’t move with you if you leave your job. And unlike HSAs, you don’t need to report FSAs on your yearly income tax return.