The FSA

An FSA lets you pay for qualified medical expenses with pretax income, thus cutting your tax bill. You can fund an FSA through a voluntary salary reduction. In addition, your employer can contribute. Neither federal income taxes nor Social Security or Medicare taxes are deducted from contributions. For 2018, you can contribute up to $2,650 to an FSA.

At the beginning of the 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 $500 into the following plan year.

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

The HRA

Employers, who are the sole funders of an HRA, can contribute to it as much as they’d like. Their contributions aren’t included in your taxable income. As with FSAs, HRA distributions that you use to reimburse for qualified medical expenses aren’t taxed. Unused amounts in an HRA can be carried forward.

There is one downside. If you’re self-employed, you’re not eligible for an HRA.

The HSA

An HSA is a tax-exempt account used for qualified medical expenses. You can establish one with a qualified HSA trustee — many banks and insurers qualify.

You and your employer, as well as family members and others, can contribute to your HSA. For 2018, contributions are limited to $3,450 if you’re an individual with self-only health care coverage. If you have family coverage, you can contribute up to $6,900. You can boost your contributions by another $1,000 if you’re age 55 or older by the end of the tax year.

Several features of HSAs are particularly attractive. For instance, you can make contributions with pretax dollars. And you can invest the 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.

That’s not all. Contributions can remain in your account until you need to use the money. An HSA is portable, so you can take it with you if you change employers or quit working. And you can contribute to your HSA until the tax return deadline, even if the contribution is for the prior year.

But to open an HSA, you must be covered under a high deductible health plan (HDHP). For 2018, the HDHP deductible must not be less than $1,350 for self-only coverage, or $2,700 for family coverage. Annual out-of-pocket expenses can’t exceed $6,650 for self-only coverage, and $13,300 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 would impact both Medicare and Social Security benefits, and could expose you to penalties.

The regulations governing how HSAs, Medicare and Social Security interact quickly get complicated. Talk with an expert and carefully consider the pros and cons before taking this step.

How to spell good health care

Health care costs can quickly add up. These plans have several requirements to be aware of, but they can help offset some of the costs.

© 2018