Healthcare is one of the biggest concerns for most people reaching retirement age. A health scare or unforeseen visit to the hospital can result in steep bills and a significant dent in your bank account. For many Americans, Flexible Spending Accounts and Health Savings Accounts have provided practical solutions for their healthcare concerns. Recent legislative changes have affected the way these accounts work. Here’s what you need to know about how these changes may influence your financial retirement in West Palm Beach.
HSA stands for Health Savings Account. This type of account functions like a savings fund, except dedicated for medical expenses. With an HSA, you put money away pre-tax to pay for medical costs designed by the account. These accounts are designed to lower overall health care costs by paying for deductibles and copayments with untaxed dollars.
FSA stands for Flexible Spending Account. This account functions similarly to an HSA, allowing you to put pre-tax earnings directly into a fund that will be used to pay for qualified medical expenses. Despite the name, FSAs are not particularly flexible with the funds, and they expire at the end of the year.
Although there are many similarities between these two types of health care accounts, there are many more differences. For starters, FSAs are employer-provider, which means they offer much less flexibility when it comes to the funds. On the other hand, FSAs also tend to have lower annual contribution limits, making them less expensive to maintain, freeing up more money for your financial retirement in West Palm Beach.
A recent survey found that 40% of respondents with access to a health savings account (HSA) do not fully understand how they work. Basically, HSAs are paired with high-deductible health plans to help people save money for their plan’s high deductible, copayments, and other qualified expenses.
However, the real value of an HSA lies in its tax-free advantages. Contributions are made tax-free (reducing your current taxable income) and can be invested for tax-free growth in various mutual funds, stocks, and exchange-traded funds (ETFs). Additionally, HSA withdrawals are tax-free as long as they are used to pay for eligible products and services.
In 2021, the contribution limit for a health savings account is $3,600 for individuals and $7,200 for families; anyone age 55 or older can make an additional $1,000 annual contribution.
Throughout the past year, Congress expanded the eligible uses of these funds, further increasing their value and allowing you to purchase a broader range of personal and health-related products using tax-free income.
If you have access to one of these accounts through work or purchase health insurance on the individual market, they are a good idea to include in a financial portfolio. If you’d like assistance determining how to invest your HSA savings to complement your financial retirement in West Palm Beach, don’t hesitate to call us for advice.
The CARES Act, passed in spring 2020, expanded the types of products that can be paid for with HSA or employer-sponsored Flexible Spending Account (FSA) savings. Under the new regulations, these funds can be used to pay for over-the-counter medications, like ibuprofen and Claritin. Other products that are now eligible for purchase with HSA and FSA funds include:
In February, the IRS published guidelines giving employers more flexibility to extend how long employees have to use their FSA funds. Normally these are “use it or lose it” by the end of the year, with a short grace period.
However, due to job interruptions last year, new guidelines allow employers to extend those funding rules to carry over or extend the grace period for unused health and/or dependent care FSA funds for plan years 2020 and 2021 to the immediately following plan year. Note that the new rules permit employers to make these changes, but it’s up to the employer to decide what to do.
FSA owners with more time and opportunities to spend their funds have many new approved items for which they can use that money – even for gift ideas (these expenses are approved for an HSA as well):
The Personal Health Investment Today (PHIT) Act is a bipartisan bill introduced in March. If passed, it would permit the use of pre-tax FSA and HSA funds to pay for healthy living products and activities, such as gym memberships, fitness equipment, and sports-league fees.
It can prove impossible for the average person to track all the changes that may affect your finances. We can help! Legacy Financial Partners has the expertise and insight to guide you to your desired retirement goals. Give us a call today to schedule a meeting!
Content prepared by Kara Stefan Communications. Edited and optimized by Digital Resource.
1 Brian O’Connell. Omaha World-Herald. March 4, 2021. “Saving For Medical Expenses With An HSA.” https://omaha.com/business/investment/saving-for-medical-expenses-with-an-hsa/article_3412a1e3-63be-51f0-8ebe-f6c49b3ddb2c.html. Accessed March 23, 2021.
2 Regan Olsson. BannerHealth. July 19, 2020. “7 Things Covered by Your FSA That Might Surprise You.” https://www.bannerhealth.com/healthcareblog/advise-me/7-things-covered-by-your-fsa-that-might-surprise-you. Accessed March 23, 2021.
3 JD Supra. Feb. 22, 2021. “IRS Notice 2021-15 Provides Clarity Regarding FSA Relief Available Under Consolidated Appropriations Act Benefits Law Update.” https://www.jdsupra.com/legalnews/irs-notice-2021-15-provides-clarity-3663572/. Accessed March 23, 2021.
4 Megan Leonhardt. CNBC. Dec. 15, 2020. “15 surprising things you can buy with your leftover FSA dollars.” https://www.cnbc.com/2020/12/15/15-surprising-things-you-can-buy-with-your-leftover-fsa-dollars-.html. Accessed March 23, 2021.
5 Jody Heemstra. DRG News. March 19, 2021. “Thune, Murphy Reintroduce Bill to Encourage Healthy Living.” https://drgnews.com/2021/03/19/thune-murphy-reintroduce-bill-to-encourage-healthy-living/. Accessed March 23, 2021.
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