Sometime in the next few months you will have the opportunity to select a health plan for 2015. Your tendency may be to leave things as they are now and ignore the enrollment material you receive from your employer, Medicare or your current carrier. That may be a mistake!
The best advice I can give is to read every piece of information you receive. The offerings you have for 2015 and the cost to you probably changed, keeping what you have now may not even be an option. If you do nothing you could be placed in a default plan possibly resulting in a nasty surprise with your first expense in 2015.
Let’s start with a simple thought. If you have a flexible spending account (FSA) available, use it. If you have a health savings account (HSA) available, use it.
Regardless of the health plan you have, it’s a good bet you will have out-of-pocket costs, some services will not be covered and you will also have dental and vision expenses. You can either pay these costs with after-tax or pre-tax money; your money. The choice seems clear.
Flexible Spending Account
You can contribute up to $2,500 each year to your account. If your spouse also works that’s a combined $5,000. You can carry over up to $500 in unused FSA money each year or your plan may permit a grace period so you can incur expenses over more than twelve months. Before you put money into a FSA, read the information provided by your plan. Not all plans include these provisions. Because all of the money you elect to place in a FSA is available for eligible expenses from the first day of the plan year (before you actually contribute the full amount), some employers will limit your contributions to less than the legal limit.
Yes, there is that pesky use it or lose it provision. But you can plan for that. It is not a reason to avoid a FSA.
Generally you cannot have a FSA and a HSA at the same time. However, there is an exception, the limited purpose FSA.
A limited-purpose flexible spending account is like a typical health FSA. However, eligible expenses are limited to qualifying dental and vision expenses for you, your spouse, and your eligible dependents. Check to see if your employer offers a limited purpose FSA.
If you have predictable expenses like orthodontia or maintenance prescription drugs, you’re leaving thousands of dollars on the table by not signing up for a FSA. If you have a limited purpose FSA (for vision and dental) because you also have a health savings account, be careful that’s all you use it for. Of course, you can use a regular health FSA for dental and vision expenses if you do not also have a HSA.
Generally, what counts towards the medical expenses deduction under Internal Revenue Service Publication 502 qualifies for reimbursement under a FSA (note: for over-the counter medications, you need a doctor’s prescription).
Health Savings Account (HSA)
In order to use a HSA you must participate in a qualified high deductible health plan that meets IRS requirements. Also, there are limits on how much you may contribute toward your HSA.
High deductible health plan. For calendar year 2015, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage. Your plan may have higher deductibles, but not a higher out-of-pocket limit.
Annual contribution limitation. For calendar year 2015, the annual limitation on deductions under § 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,350. For calendar year 2015, the annual limitation on deductions under § 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $6,650
The above limits generally increase each year.
Your contributions to the HSA are before-tax (if made by payroll deduction) or tax-deductible. Contributions are tax-deductible on your Federal tax return; some states do not recognize HSA contributions as a deduction. For more details, refer to IRS Publication 969.
Here are some tips from a typical employer plan:
🔴 You can make tax-free withdrawals for qualified medical expenses. Qualified medical expenses that can be paid through your HSA on a tax-free basis include medical, dental, vision, and prescription drug co-payments, coinsurance, and deductibles.
🔴 Any interest earned in your HSA is tax-free, which means you won’t pay taxes on that money (or your pre-tax contributions) when you take it out of your HSA to pay for eligible health care expenses. There are penalties if you take money for other purposes.
🔴 Unused funds and interest are carried over, without limit, from year to year.
🔴 You own the HSA and it is yours to keep—even when you change jobs, medical plans, or retire.
🔴 Only amounts that are deposited in your HSA will be available to pay for eligible health care expenses. That means the entire amount you elect to contribute to your HSA for the year will not be available in January. Funds will be available as they are deposited into your account, and you can use them to pay for eligible health care expenses.
🔴 If you enroll in the High Deductible Health Savings Plan and a HSA for 2015 and are currently participating in a flexible spending account, you’ll need to use all the money in your 2014 FSA by December 31, 2014 to be sure you receive the employer (if any) and your contributions in your HSA in January, 2015.
🔴 If you are enrolled in your employer’s High Deductible Health Plan and you are covered by another medical plan, it must also be designated as a High Deductible Health Plan (HDHP) to be enrolled in and use a HSA (for example, if you are also enrolled in your spouse’s employer’s coverage, that plan must be a HDHP, as well). In addition, if your spouse participates in a FSA and you participate in a HSA, your medical expenses will not be eligible for reimbursement under your spouse’s FSA —that’s because you’re eligible for the HSA, which you can use to reimburse yourself for eligible health care expenses.
🔴 You cannot be enrolled in Medicare and contribute to a HSA.
🔴 You can only pay for health care expenses of tax-eligible dependents under your HSA (that’s different from enrolled adult children to age 26).
🔴 You cannot be claimed as a dependent on someone else’s tax return to be eligible for a HSA.
🔴 If you withdraw money from your HSA to pay for nonqualified expenses, you’ll pay taxes on that distribution and will have a penalty if you’re under age 65. You should keep careful records of your health care expenses and the corresponding withdrawals from your HSA, in case you need to provide proof of your account distributions.
🔴 You can invest your HSA dollars, generally in a variety of mutual fund options. Any earnings you invest through your HSA are automatically reinvested and grow tax-free. Your plan probably requires a minimum amount in your HSA before you can make investments.
Confused? That’s why you need to take the time to read the material you are provided by your employer or insurance company. You need to understand the rules so you can maximize the benefits and avoid unpleasant surprises.
The Health Savings Account can also be a powerful tool to enhance retirement. That’s because your account can be carried over and accumulate in value year after year. Here is an article on this concept.
In case you missed them, look under the Employee Benefits category on this blog for parts 1-3 of this Preparing for Health Benefits Open Enrollment series
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