Now it’s the time for employers to initiate discussion about 2020 healthcare plans. Thus it is important to choose the best health care plan that suits you and your tax saving plans. There are two types for tax-free health care plans that are provided by IRS as HSA (health savings account) and FSA (flexible spending account or arrangement). Both have the benefits of tax savings but in different ways.
What is Health Savings Account (HSA)?
HSA plans are provided by the employers or through banks and other financial institutions, if your employer does not provide health insurance. Therefore, both working persons and self-employed individual are eligible to contribute to HSA. HSA is not owned by the employer. Both working and self-employed individuals need to sign in for HDHP (High Deductible Health Plan) to become eligible to contribute to HSA. HDHP are types of health insurance plans that has low premium with high deductibles. Many insurance companies offer such plans along with the option to open HSA.
The HSA’s contribution is eligible for tax deduction while filing for returns if you are opening the account from private insurance companies. If your employer offers an HSA, you’d likely fund it pretax from your paycheck but it can be tax-deductibles also. Also, the HSA contribution can be used for other investments like stocks, bonds etc. which are also tax-free.
For the year 2020, one can contribute up to $3,550 for self-only coverage, and up to $7,100 for family coverage into an HSA. The minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family for the year 2020. This is an increase of $50 and $100 respectively from the year 2019. Further, HSA dollars are carry-forwarded year-after-years if it is not spend.
What is Flexible Spending Arrangements?
This type of account is only available to the working people under an organization and not eligible for self-employed individuals. Flexible spending is provided through employers and cannot be transferred when you leave that company. It is not mandatory for all the employers to offer FSA. Employers deduct the FSA contribution from the paychecks before taxes in regular increments.
IRS set the FSA contribution for the year 2020 as $2,750 which is not subject to federal income tax, Social Security tax or Medicare tax. The FSA contribution can be used for own medical expenses, child care and dependent care.
The FSA amount cannot be rolled over to the next year plan, and hence it has to be used in the same year. However, IRS offers two options as grace period and carry-over option. The grace period let you to incur eligible expenses for two and half months from the end of the current year plan. The carry-over option allows the employee to carry-over unused money with maximum of $500 to the following year. But individuals can only available either of one option or none.
Choosing between HSA and FSA can become stressful if one does not pay attention to the real benefits both offers. HSA seems a flexible plan but the HDHP will have high out-of-pocket limits whereas FSA have limited options. It is important for any individual to choose the right health care plans based on the availability from your employers, your health conditions, planned amount for contribution etc.
Both HSA and FSA are subjected to IRS audit. Therefore it is advisable to keep all the receipts that are spent using HSA and FSA money. IRS Audit Group is the tax audit representation firm in California that defends you in front of the IRS for any tax audit disputes. We are enrolled agents, CPAs and tax attorneys offering tax audit and state audit representation services. Contact us for free consultation – firstname.lastname@example.org/1-888-300-6670.