How a Health Savings Account Can Lower Your Tax

A Health Savings Account is an employee benefit program that helps workers save a substantial amount of money in taxes by paying for certain health related expenses from their pre-tax income. Some eligible HSA expenses are medical, vision, dental, pharmaceutical and dependent care. There are several types of health savings account plans each with it’s own unique requirements.

A Health Savings Account is an employee benefit program that helps workers save a substantial amount of money in taxes. This account allows you to pay for certain health-related expenses from your pre-tax income. Some eligible HSA expenses are medical, vision, dental, pharmaceutical, and dependent care. There are several types of health savings account plans each with its own unique requirements. 

Types of Health Benefits Savings Accounts

• Health Savings Accounts (HSAs)

• Health Flexible Spending Arrangements (FSAs)

• Health Reimbursement Arrangements (HRAs)

Understanding a Health Savings Account

A Health Savings Account (HSA) is an investment account that you can use to save money for health care expenses. You set up the account with a qualified trustee. You do not need permission or authorization from the IRS. The qualified trustee could be a bank, insurance company, or someone already approved by them. The trustee of your HSA must also be different than that of any medical insurance plan providers you have as well. An HSA can be established by your employer or by yourself.

Benefits of an HSA

• HSA Contributions made by you are deductible on your return, even if you don’t itemize your return.
• Contributions made by your employer to your HSA may be excluded from your gross income.
• The money you place in your account stays there until you use it.
• Interests and other earnings gained in the account are tax-free earnings.
• Qualified medical expenses used for distribution may be tax-free.
• An HSA can go with you when you change jobs or when you retire.

HSA contributions do not have to be used within a single year. They can be saved for future use, even into retirement.

Requirements for Qualifying for an HSA

• Your medical insurance is has a high deductible plan.

• You don’t have other health coverage. There are some exceptions to this rule, which are determined by the IRS standards. Your employer should have the appropriate information. 

• You can’t be enrolled in Medicaid. 

• You aren’t listed as a dependent on someone else’s tax return.

Understanding Flexible Spending Account

A Flexible Spending Account or Arrangement (FSA) is a plan that allows you to receive money for medical expenses. With an FSA, you agree to take less salary in your paycheck. That money then goes into a special account which is held for your use with qualified health expenses. When you pay those expenses you will be reimbursed through the FSA account. Contributions into an FSA account can be made by you and your employer. Because you are taking less salary, that amount is not shown on your gross income statement. You don’t need to pay any taxes on the monies contributed to an FSA.

Benefits of an FSA

• Any contributions added by your employer can also be excluded from your gross income.

• No income taxes are deducted from your contributions.

• The amount you are reimbursed is most often tax-free if you use it to pay qualified medical expenses.

• Since the money is added over the course of the year from your paychecks, you are able to use the full contributed amount of the FSA to pay qualified medical expenses throughout the year, rather than waiting until the end of the year to use the funds.

If you do not use all of the funds in your FSA account you will lose those funds. There may be a role over time period from one year to the next but is usually limited to the first few months of the year. If at the end of the allowable expenses period there is still money in the account, the remaining money reverts to the employer.

Requirements for Qualifying for an FSA

• To qualify for a Health FSAs your employer must have an established FSA as part of your employee benefit plans.
• An FSA can be included in other employer-provided benefits packages, often referred to as a cafeteria plan.
• Independent contractors or, self-employed individuals do not qualify for FSA.

Even though both accounts offer tax benefits, you can only qualify for an HSA if you have a high-deductible health plan. You must also be sure to keep records of all your contributions and expenses throughout the year as they cannot exceed what had been deducted from your paycheck during that time period. HSAs are great investments because funds roll over annually and there are options available in some cases such as investment choices.

Health Reimbursement Account

A Health Reimbursement Arrangement (HRA) is a group health plan from which an employer will add a monetary benefit to a reimbursement account for employees to use for medical expenses. Employers can also carry over unused amounts to be used in the future. The employer funds and owns the HRA.

The health savings account is a great way to lower your tax liability for the year. With an HSA, FSA, or HRA, you will have more money to spend on healthcare and less in taxes. Contact us today if you need help determining how to document your contributions for your tax return.

This information is not intended as legal or tax advice. Cowdery Tax and its representatives does not offer legal or tax advice. We offer services for business bookkeeping, payroll, tax payments, and personal tax filings. We share information that is publicly available. Tax laws may change with or without notice that may alter or change the information contained in this publication.