A health savings account (an HSA) offers benefits that are not available through either a health flexible spending arrangement (an FSA) or a medical savings account (an MSA). Health savings accounts are the newest solution to help you save for health care expenses and make those costs tax deductible. First, let’s clarify how these three types of accounts are different.
Who Can Establish These Savings Accounts?
Your employer must establish an FSA for you, and self-employed people are not eligible to set up an FSA for themselves. In contrast, individuals and families may set up their own HSA completely independent of their employment situation.
You may open an MSA if you or your spouse work for a small business that has a high-deductible health plan for either of you. A small business is defined as a firm with an average of 50 or fewer employees during either one of the past two calendar years. This definition may be altered for new or growing employers. If either you or your spouse are self-employed and have a qualified high-deductible health plan, you can also open an MSA.
How Are These Savings Accounts Funded?
An FSA is usually funded by voluntary salary reductions. No employment or federal income taxes are taken out of contributions. Your employer may also make deposits and those contributions can be excluded from your gross income.
Both you and your employer may fund an HSA Plan. Contributions made by you or anyone other than your employer are tax deductible even if you don’t itemize deductions. In addition, the contributions from your employer may be excluded from your gross income.
Either you or your employer may deposit money into an MSA, but both you and your employer cannot contribute during the same year. You can claim a tax deduction for your contributions even if you don’t itemize deductions and you don’t have to pay tax on the contributions from your employer.
Who Actually Owns These Savings Accounts?
Your employer decides what expenses are qualified to be paid for from an FSA, and you may lose any funds left in your FSA at the end of the year. Your employer can set different rules allowing you to keep all, some of none of the money in your account.
Your HSA Health Plan is totally under your control and you keep all of the funds, which roll over from year to year whether you leave your job or retire.
The funds in your MSA also roll over from year to year and are yours to keep whether you stay with your employer, change jobs or retire.
How Do The Tax Advantages Compare?
No employment or federal income taxes are taken out of your employer’s contributions to your FSA and contributions can be excluded from your gross income. The withdrawals you make for qualified health care expenses may be tax free, but your employer decides which expenses are qualified.
With an HSA Plan or an MSA, you can claim a tax deduction for qualified health care expenses that are set by law. Both the money you deposit and the interest or other earnings are tax-free, but non-medical withdrawals are fully taxable and generate penalties.
What Are The Contribution Limits For These Accounts?
There are no standard limits on FSA contributions, but many employers set a maximum of less than $5,000. In 2013, FSA contributions will be limited to $2,500 a year with annual increases for inflation.
The maximum contribution to an HSA stays the same in 2011. That’s $3,050 for an individual and $6,150 for a family.
For an MSA, you or your employer can contribute up to 75 percent of your annual health insurance deductible if you have the plan for the entire year. If you have an individual plan, you can contribute 65 percent of your annual deductible. If you have the plan for less than the whole year, the contribution is reduced accordingly.
In any case, you can’t contribute more than you earn during the year from the employer associated with the health plan. When you and your spouse both have a family plan, the contribution limit will be equally split between you unless you agree to a different arrangement.
If you are self-employed, you can’t contribute more than your net income from self-employment minus expenses, including the one-half of self-employment tax deduction.
By Wiley Long – President, HSA for America – The nation’s leading independent health insurance agency specializing in individual and family HSA plans that works with a Health Savings Account.