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Health Savings Accounts

Health Savings Accounts and Flexible Spending Accounts

The skyrocketing cost of health care often derails people’s financial plans if they lack adequate insurance coverage or a plan to address a medical crisis. You can save money in accounts geared toward addressing health care costs while also enjoying significant tax advantages.

Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) both offer specific benefits that you will want to weigh when deciding which fits your needs.

Details of the HSA

HSAs allow you to set aside pre-tax dollars in an interest-bearing account to cover future medical expenses as long as you’re enrolled in a high-deductible health plan. You can deduct your contributions, and your earnings will grow tax-deferred. Your distributions will be tax-free when they are used for qualified medical expenses, which include doctor visits and hospital stays as well as eyeglasses, contacts, chiropractic care and prescription drugs.

Another advantage of the HSA is that you can keep your account active even if you switch jobs, so you’ll always be able to contribute and distribute money. You can open an HSA either through your employer or on your own with a financial institution that offers them.

HSA Eligibility Requirements

  • Must have a high-deductible health insurance policy
  • Cannot be a dependent of another taxpayer
  • Cannot be enrolled in or eligible for Medicare or other health insurance
  • Must be younger than 65 

Details of the FSA

Contributions to an FSA also come from your gross pay as pre-tax money, just like an HSA, and your withdrawals likely won’t be taxed if used for qualifying medical expenses. Child care expenses qualify, too, so you might be able to enjoy some additional tax benefits by using an FSA to pay for daycare, depending on what your accountant tells you.

One of the main differences with the FSA is that you have to declare how much of your paycheck you want your employer to deduct and place into your account each pay period. And you must spend all of your declared funds within that tax year; otherwise, the unused money will be lost. For this reason, it’s important to have a detailed plan for how much you’re going to spend on child care and what you’ll need for medical expenses throughout the year.

Also, there are contribution limits that the IRS sets each year. Check with your employer to find out your maximum allowable contribution.

FSA Eligibility Requirements

  • Must be employed by an outside employer (can’t be self-employed)

Take a look at your financial situation and then talk to your Bay Area employer and financial advisor to determine which of these accounts can most effectively serve you and your family’s health care needs.