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    How tax-advantaged health plans contribute to your financial well-being

    How tax-advantaged health plans contribute to your financial well-being

    Financial Planning

    You’ve likely heard of these common tax-advantaged health care plans: Flexible Spending Arrangements (FSAs), Health Reimbursement Arrangements (HRAs), and Health Savings Accounts (HSAs). But do you know what they offer and, given your specific health and financial concerns, which one might be the best fit for you?

    Paid with pretax dollars

    The primary advantage of an FSA is that it allows you to pay for qualified medical expenses with pretax income, thus cutting your tax bill. You can fund an FSA through a voluntary salary reduction, and your employer can also make contributions. Neither federal income taxes nor Social Security or Medicare taxes is deducted from contributions. For 2021, you can contribute up to $2,750 to an FSA.

    At the beginning of each plan year, you decide how much to contribute to your FSA. It pays to give this some thought, because you may forfeit any balance in the account at year-end. But your employer can provide a grace period of up to two and one-half months — or allow you to carry up to $550 into the following plan year.

    For your FSA, you’ll need to provide a written statement that documents the medical expenses incurred. Common qualified medical expenses include contact lenses, dental services, and eye exams and glasses.  

    Contributions excluded from income

    Employers are the sole funders of HRAs, and they can contribute to them as much as they’d like. HRA contributions aren’t included in your taxable income and, as with FSAs, HRA distributions used to reimburse for qualified medical expenses aren’t taxed. Unused amounts in an HRA can be carried forward.

    However, there’s one downside to this: If you’re self-employed — or a partner or S corporation shareholder — you’re not eligible to use them.

    Tax-exempt and more

    An HSA is a tax-exempt account used for qualified medical expenses. You can establish one with a qualified HSA trustee, such as a bank or insurance company.

    You, your employer, family members, and others can contribute to your HSA. For 2021, contributions are limited to $3,600 if you’re an individual with self-only health care coverage. If you have family coverage, you can contribute up to $7,200. And if you’re 55 or older by the end of the tax year, you can add an additional $1,000 to your HSA.

    HSAs offer several benefits. For example:

    • You can make contributions with pretax dollars.
    • You’re allowed to invest HSA money in mutual funds, stocks, and some other securities, where it can grow tax-free.
    • Distributions that cover qualified medical expenses incurred after you establish the HSA generally aren’t taxed.
    • Contributions can remain in your account until you need to use the money.
    • HSAs are portable, so you can take yours with you if you change employers or quit your job.

    Another advantage? You can contribute to your HSA until the tax return deadline, even if the contribution is for the prior year.

    Beware of restrictions

    If you’re interested in opening an HSA, there are several restrictions you should know about. You must be covered under a high deductible health plan (HDHP). For 2021, the HDHP deductible must not be less than $1,400 for self-only coverage or $2,800 for family coverage. Annual out-of-pocket expenses can’t exceed $7,000 for self-only coverage and $14,000 for family coverage. HSA distributions that aren’t used for qualified medical expenses are subject to income tax.

    In addition, you can’t be claimed as a dependent on another person’s tax return. In most cases, you (and your spouse, if you have family coverage) can’t be covered under another health plan — including Medicare. If you’d like to continue contributing to an HSA after you’re eligible for Medicare, you’d need to delay enrollment. This could expose you to penalties.

    Non-health factors

    Although FSAs, HRAs, and HSAs are health savings plans, be sure to consider non-health factors, such as your tax exposure and other potential uses for your money, when deciding whether to participate in one. Consult your employee benefits manager and consider seeking outside financial advice.