For many Americans, tax-exempted medical savings accounts can offer a great way to reduce tax liabilities on qualified medical expenses. But, choosing the correct account for medical needs could mean the difference between greater savings and heavy losses.
Federal regulations enacted by the Obama Administration’ Affordable Care Act have changed many of the features previously available in medical savings accounts. But the basis of how these sort of accounts work is simple: helping Americans save as much pre-tax dollars as possible on their medical expenses to keep up with rising medical expenses.
HSA Accounts—An Alternative to Retirement Savings:
The Internal Revenue Service introduced HSAs to the American public back in 2003 as part of the Medicare Act. In order to enroll into HSA arrangement, you have to be covered by a high deductible plan, meaning you expect to spend at least $1,200 out-of-pocket on medical expenses if you’re an individual, and $2,400 for a family plan. In addition, you must also have no other medical coverage, you cannot be enrolled in Medicare and you cannot be claimed as a dependent on someone else’s 2010 tax return.
Health savings accounts are beneficial because they allow individuals to portion a specified amount of their take home pay into a tax exempt account. Funds placed into an HSA can also be rolled over on a year-to-year basis. Account holders can even withdraw funds from the account without penalty for retirement income once an account holders turns 65. Additionally, employers can also make contributions to their employees’ HSA accounts, though that will vary from business to business.
The amount that you can contribute to an HSA account will vary depending on the type of plan you have. For example, in 2010 individuals could contribute a maximum of $3,050 to the HSAs while a family could contribute up to $6,150. The same limits apply for 2011, according to the IRS.
If you qualify to open an HSA account and your employer’s health care plan doesn’t offer one then a number of U.S. banks allow customers to open individuals HSA accounts, such as Bank of America, Citibank and Wells Fargo.
With an HSA account, you can deduct any expenses from the account, though only qualified medical expenses can be deducted tax free.
FSA Accounts—Great Savings But Not Without Risk:
Similar to FSAs, Flexible Spending Accounts allow their holders to place a portion of their gross income into a tax exempt account. The amount that you elect to have withdrawn from you pretax income for the full year will automatically be available to you at the beginning of the year you open your account. Unlike HSAs, FSA don’t require that you have a health plan to participate in them.
The downside to these types of plans is that, unlike HSAs, the funds don’t roll over. That means that if you don’t use the amount you set aside for qualified medical expenses over the course of the year, then you’ll lose it. A new bill proposed by Congressmen Charles Boustany (R-La.) and John Larson (D-Conn.) last month is currently aimed at allowing those with FSA accounts to withdraw funds and pay taxes on the amount in lieu of forfeiting unused funds.
Also unlike HSA accounts, your employer determines the maximum amount that you can deduct from your flexible spending account, and there’s no need to report the income to the IRS.
Do you participate in an FSA or HSA program? How has your experience been like? Let us know in the comments section.