Know Health Accounts’ Costs
Open enrollment looms for workers’ to sign up for employer-sponsored health-care plans. This enrollment season promises to resemble few others.
For 2014, health care premiums will increase by about 5%, according to the 15th annual Employer Health Benefits Survey by the Kaiser Family Foundation and the Health Research & Educational Trust. Families will pay an average annual cost of $16,351 (with workers paying $4,565 in premiums) and individuals $5,884 (with workers paying $999).
In this first enrollment season after Obamacare, pay attention to your options and understand some of the benefits available – including the health savings account (HSA) and flexible spending account (FSA).
Individuals or families in a high-deductible health plan (HDHP) establish an HSA, a tax-advantaged medical savings account, to pay for qualified medical expenses. You may deduct 100% of contributions from your federal income tax and withdraw them tax- and penalty-free to pay for such medical expenses as co-payments, prescription drugs and insurance deductibles. HSAs, significantly, have no requirement you spend the balance in a given year; unused funds can grow tax-deferred for use in later years.
For 2013, you can contribute pre-tax up to $3,250 for individual coverage and $6,450 for family coverage. In 2014, those amounts increase to $3,300 for individuals and $6,550 for families, according to figures relayed by the Society for Human Resource Management. You also kick in an additional $1,000 if you’re 55 or older. Minimum HDHP deductibles remain at $1,250 for individuals and $2,500 for families. HDHP out-of-pocket expenses, excluding premiums, max out at $6,350 for individuals and $12,700 for families.
As long as you track your medical costs, you can withdraw money for reimbursement at any time. In addition, HSA withdrawals not used for qualified medical expenses resemble withdrawals from individual retirement accounts: You’ll be taxed on the distribution at ordinary rates and incur a 20% penalty for withdrawals before age 65.
Similar to an HSA, the FSA allows pre-tax contributions to pay for qualified medical expenses. The FSA, however, has the use-it-or-lose-it requirement – any unused amount in the account at the end of the year vanishes. This requirement often sends FSA holders scrambling at year’s end to schedule dental exams, stock up on first-aid supplies or splurge on expensive glasses frames before the money’s gone. To answer a common (and often angry) question, much unused FSA cash usually returns to the employer who sponsored the plan.
For 2013, you can make pre-tax contributions of $2,500 per employee for health FSAs; if you and your spouse each own an FSA you can kick $2,500 into each plan. You need not have coverage under any other health-care plan to participate.
An important note about FSAs: Participating employees may use their entire annual contribution for qualifying events at the start of the plan year or after the first contribution is made. You can use the full $2,500 from that initial contribution period forward to pay for qualifying expenses even if you haven’t fully funded the account when the year opens and even if you elect to contribute the $2,500 in installments throughout the year.
When establishing either of these accounts, pre-plan and anticipate your medical expenses for any given year. For example, if you have an FSA and anticipate the birth of a child or a surgery, increase your contributions.
As you go into open enrollment season, remember that the FSA will provide you with a tax-advantaged double threat of tax-deductible contributions and tax-free distributions for qualified medical expenses. The HSA goes one step further with tax-free interest and dividend accumulation – making it a tax-advantaged triple-threat. Either constitutes a handy tool in a time when every dollar of medical expense counts.
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Mary Beth Storjohann, CFP(R), is the founder of Workable Wealth, an RIA in San Diego. She is a writer, speaker and financial coach who is passionate about working with individuals and couples in their 20s and 30s to help them organize and gain confidence in their financial lives. She has been quoted or featured in various industry publications on the local and national level. You can find her on Twitter at @marybstorj.
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