Q&A About this Tax-Free Money for Health Care
HSAs and FSAs are different types of accounts that can help you save money on health care expenses and taxes. If you are deciding upon a health insurance plan at your job, you will probably be familiar with these terms. However, you may not fully understand what they are and how to use them. We believe that everyone should be well informed about their health care financing options, so the staff at our eye care center in Copperas Cove explains:
What is an HSA?
HSA is the name for “health savings account.” It is similar to a savings account for medical expenses. But you can only set up an HSA if you already have an insurance plan that has a high deductible. Your deductible is the amount of money you’ll need to pay for medical expenses before your insurance plan steps in to provide coverage.
Whether you work for a company or you are self-employed, you can set up an HSA. You just need to have a high-deductible plan. Some companies may deposit the full deductible or a part of it into your HSA. This money is not categorized as income, so it is not taxed. Other employers will just set up the HSA account on your behalf, and you must deposit into it.
Even if your employer adds to the money in your HSA account, you may add additional tax-free funds. However, the amount you are allowed to contribute is limited. In 2018, this total amount – from you and your employer – was set at not more than $3,450 per year (before paying taxes). The limit is $6,900 for family coverage, and if you are above 55 years of age, you can add an extra $1,000 annually.
How can I use the money in an HSA?
You can use it to pay for medical expenses or your annual deductible in our Copperas Cove offices, including:
- Eyeglasses and contact lenses
- Visits to the doctor
- Prescription medication
- Hospital stays
What Are the Tax Benefits of an HSA?
There is a triple tax break with HSAs:
- Contributions into the account are not regarded as income, so they are income tax-free
- You are not charged taxes on any increases in the total amount of money in the HSA. You can switch the money into mutual funds and other investments after your balance reaches a certain level, if you want.
- Withdrawing the money for medical expenses carries no penalty
You can maintain your HSA even if you switch jobs, just as you do with an IRA or 401K account. Also, you can roll over any money that you don’t use from year to year and invest it. Before you reach 65 years old, be aware that if you spend any of the funds on nonmedical purposes, you will be penalized 20% plus taxes on the amount you use.
What is an FSA?
This term stand for “flexible spending account.” The money that is deposited into an FSA is tax-free, and typically, you won’t need to pay taxes on any funds you spend from an FSA – as long as the money is used for qualified medical expenses.
An employer must set up an FSA; you cannot set it up if you are self-employed. Also, when this account is established, you will need to tell your employer how much money you will deposit into the FSA for that year. There is a limit to the quantity of money that can be deposited; the 2018 limit was set at $2,650.
A particularly significant rule about FSA money is that it must be used within the year. You cannot roll the funds over into the next tax year, and if you don’t use the money – you lose it.
Any medical bills that are not covered by your health insurance plan can be paid with FSA money, such as:
- Medication or medical equipment not covered by insurance plans
- Copayments and deductibles
- Routine eye exams
- Prescription eyeglasses
- Prescription sunglasses
- Contact lenses
At Cove Eyecare, our Copperas Cove staff will be happy to advise you on the best ways to use your FSA and HSA funds.