New Parent Series Part II - Healthcare FSA's and HSA's

With the cost of medical care increasing, young families are feeling the burden. Common medical expenses for a growing family may include: prenatal care for mom, the birth, postnatal visits for mom and check-ups for the baby, along with any doctor visits for illnesses that the family may experience. It may be time to start setting money aside in a Flexible Spending Arrangement (FSA) or a Health Savings Account (HSA) to provide for some of these medical expenses.

Each year your Human Resources department may ask you if you would like to enroll in a FSA or a HSA when you make your annual benefit elections. Like many others, you may have no idea a) what that means, and b) what the benefits are to setting money aside for medical costs. 

So, what are these plans? Simply put, these plans provide you with a pre-tax benefit for spending your money, now or in the future, on qualified medical expenses. Such expenses may include doctor's visits, prescription medications, over the counter medications for which you have a prescription, insulin, braces for teeth, eye exams, eye glasses, breast pumps and supplies, and fertility enhancements among other expenses. In the event that you leave your job and qualify for health care continuation of coverage (COBRA), you may continue to be able to use funds from these accounts for related expenses.

Both the FSA and HSA allow you to set pre-taxed money aside for medical expenses which reduces your taxable gross income. For example, if an employee in the 20% income tax bracket contributed $2,600 to a pre-tax FSA or HSA he would save over $500 in federal and state taxes by the end of the year! Some employers may fund these accounts regardless of employee contributions (though they are not required to). For example, your employer may contribute enough funds to your HSA to cover the cost of your deductible. When the funds are used for qualified medical expenses, the distributions from these plans may also be tax-free.

Some significant differences between the plans are listed in the following chart:

	FSA	HSA
Compatible with any type of health plan?	Yes	No, you must have a high deductible insurance plan defined as having a family deductible of at least $2600 and max out of pocket of at least $13,100.
Limitation on your contributions?	Your contribution for salary reduction cannot be more than $2600 for the year (unless otherwise specified by your plan)	You can contribute up to $3400 for self, or up to $6750 for family
Does money rollover from year to year?	Only under grace period of 2.5 months after plan year ends OR an amount up to $500 may rollover depending on the rules of your plan	Yes, including yearly contributions and any earnings accrued over time
What happens to the funds in the account when I leave my current job through which I set up this plan?	The funds will likely stay with your employer unless you enroll in COBRA and your plan allows you to continue using the unused FSA funds to pay for medical expenses incurred after leaving your job	The account and its balance is portable and comes with you.
Can I have this plan if I am self-employed?	No	Yes, as long as you are eligible

When deciding whether or not to put your hard earned money away in one of these plans, you must decide if the benefits outweigh the costs of having money set aside specifically for medical expenses. You will want to consider:

• Who is providing the funds for these plans?
• Can you afford to set money aside each year?
• Are there qualified medical expenses you may be planning for? (i.e. braces, pregnancy, etc.)

Another plan that your employer may offer is a Health Reimbursement Arrangement (HRA). While a similar concept to the FSA and HSA, an HRA is fully funded by your employer meaning that you do not set any money aside for future use. Rather, your employer will reimburse you (tax-free) for qualified medical expenses that you incur. The funds from this type of plan may also be used to pay for your insurance premiums and in conjunction with an FSA.

The topic of tax-favored health plans is a complex one. This post was written to make you aware of the different types of plans available and what you may want to consider when enrolling in one. If you have specific questions about FSA's, HSA's, or HRA's, I encourage you to consult your employer or Human Resources department since each plan can be different.

The next part in the series will discuss the child tax credit, the child care credit, and the employee child care credit. In the meantime, if you have any questions regarding your personal taxes and how to report information relating to having a FSA, HSA, or HRA, please feel free to contact Glick and Trostin, LLC at 312-346-8258. 

To read the other posts in the New Parent Series, simply follow these links:

New Parent Series Part I - Dependent Issues and Tax Filing Status For You to Consider
New Parent Series Part III - Child and Care Tax Credits
New Parent Series Part IV - Adoption Tax Credit and Benefits
New Parent Series Part V - Creating an Estate Pan

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