Healthcare Budgeting: Health Savings Account or Flexible Spending Account

When you sign up for health insurance, your insurance provider or employer typically gives you information to review. However, you may not always understand everything you are reading, and the information can quickly become overwhelming, especially when you are faced with decisions that will directly affect your finances.

This blog focuses on healthcare budgeting and is designed to help you better understand the differences between a Health Savings Account (HSA) and a Flexible Spending Account (FSA), as well as the benefits of each.

A Health Savings Account is a tax-advantaged medical savings account available to individuals enrolled in a high-deductible health plan (HDHP). Contributions made to an HSA are not subject to federal income tax at the time of deposit. An HSA is typically established as a tax-exempt trust and can be used to pay for or reimburse qualified medical expenses.

A qualified HSA trustee may be a bank, an insurance company, or another organization approved by the IRS. HSA accounts are available to individuals at all income levels, and the funds can be used to pay deductibles and other qualified healthcare expenses.

There has been a slight increase in HSA contribution limits for 2027. Individuals may contribute up to $4,500 annually, while families may contribute up to $9,000. Adults age 55 and older may make an additional catch-up contribution of $1,000, which remains unchanged.

Three tax benefits of an HSA include:

· Contributions are tax-deductible.

· Withdrawals used to pay qualified medical expenses are not considered taxable income.

· Account balances can grow tax-free over the life of the account.

If you withdraw money from your HSA for nonqualified expenses, you may be required to pay taxes and penalties on those funds.

A Flexible Spending Account (FSA) is another tax-advantaged account that allows you to set aside money for certain out-of-pocket healthcare expenses. Like an HSA, contributions are not taxed. However, unlike an HSA, FSA funds generally must be used during the plan year, or you may forfeit any unused balance at the end of the year.

For this reason, it is important to plan carefully and avoid contributing more money than you expect to spend on eligible expenses such as copay-ments, coinsurance, prescription medications, and other qualified healthcare costs.

FSA contribution limits for 2027 are still pending but are expected to increase. The proposed contribution limit is $3,500 per year per employer. For married couples, the combined limit is expected to be $7,500. You and your spouse may each contribute up to $3,750 through your respective employers' FSA plans.

FSA funds can be used to pay for qualified medical and dental expenses for you, your spouse, and your dependents. These funds may be used for deduct-ibles and copayments, but not for insurance premiums. Eligible expenses can also include prescription medications, certain over-the-counter medications when prescribed by a doctor, and medical supplies such as crutches, bandages, blood pressure monitors, and blood glucose testing kits.

Both HSAs and FSAs allow you to set aside money for medical expenses, helping you better manage your budget when faced with expected healthcare costs, unexpected expenses, or medical emergencies.

If you have any additional questions or want more information about this or other financial related topics, contact me at [email protected], or you can write to me at P.O.

Box 1825, Clarksdale, MS 38614.

Until next week-stay financially fit!

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