Flexible Savings or a Health Savings Account?

Flexible Savings Accounts (FSAs) and Health Savings Accounts (HSAs) allow you to contribute pre-tax dollars from your salary. You can use this money to pay for medical care and other qualifying expenses. They are not tax-deductible because they are funded from salary deferrals. However, because these are contributed to with pre-tax dollars, These accounts reduce taxable income. The maximum allowance you can make for an FSA in 2020 is $2,750. Flexible Savings Accounts or Health Savings Accounts (the latter of which is available for those with a High Deductible Health Plan), are for employees. Self-employed individuals do have the option called a Medical Savings Account (MSA).
One drawback of FSAs is that money left in the account at year end is usually forfeited. Some FSA plans, however, provide a 75-day grace period after the end of the year while other plans allow a carryover of $500 to the next year. Your plan may permit you to do one or the other, but not both.
Health Savings Accounts, however, are the better choice because you keep the money forever. For this reason, we recommend HSAs over FSAs, if you have the option. Think of it this way, H is for healthy and F is for fail.
There are three types of FSAs:
1) Health FSAs. These allow you to put aside pre-tax dollars for medical expenses. Your employer can also contribute to this account. Health FSA’s money are generally used for expenses not covered by your insurance.
2) Limited Health FSAs are for people with a Health Savings Account. These cover dental and vision services.
3) Dependent Care FSAs cover the cost of caring for children or a dependent adult, such as daycare, babysitting, or adult care services. These FSAs must be offered by your employer. You can contribute up to $5,000 for 2020 if you file taxes jointly, or $2,500 if you file single or married filing separately.
Health Savings Accounts generally have moved toward using debit cards, however, this is not yet prevalent for FSAs. Rather, most FSAs still require you to submit proof of purchase upfront and then receive reimbursement. This is another reason why we prefer HSAs.
If you have questions about FSAs, HSAs or MSAs, we welcome you to contact our office.
Professional Tax Services is a locally owned provider serving over 3,500 local residents and businesses.
For more information call 661-259-1967 or visit www.protaxservices.com. Through their complimentary EZ2 Thrive program, they provide unlimited free tax planning advice to their clients.