As “open enrollment” season begins at many workplaces, now is a great time to review your healthcare coverage and spending. There are several ways to make healthcare more cost efficient!
Flexible Spending Account (FSA)
A Flexible Spending Account is a workplace benefit that allows you to defer up to $2,750 of your salary pre-tax to an account to be used for healthcare expenses. The catch is that FSA funds expire at the end of the year, so it’s “use it or lose it.” (Some plans allow a portion to be carried over to the next calendar year, but not all.) If your employer offers an FSA, it’s a great way to save on foreseeable healthcare expenses, like glasses or scheduled procedures. Your money will stretch farther because it is not taxed.
Health Savings Account (HSA)
An HSA is a savings and investment account offered as a complement to high-deductible health insurance plans (HDHPs). Unlike a Flexible Spending Account, the HSA balance rolls over from year to year. This allows you to create a long-term investment strategy. The best part is an HSA is triple-tax-free.
Each year, you decide how much to contribute to your HSA account, though you cannot exceed government-mandated maximums. The maximum for 2020 is $3,550 (increases to $3,600 in 2021) for an individual and $7,100 (increases to $7,200 in 2021) for a family.HSA holders 55 and older may save an extra $1,000 (amount stays the same in 2021). HSA contributions are 100% tax deductible from gross income.
An HSA can be used for health expenditures such as copayments, deductibles, and services not covered by insurance. Once you turn 65 and you are required to transition from HSA contributions to distributions, this can even include Medicare premiums and health-related improvements to your home, such as a wheelchair ramp. (Consult the IRS documents for allowable expenses.)
How to Use an HSA
HSAs can play a powerful role in saving for healthcare costs in the future and even retirement. This is the most tax-advantaged way to save for health care expenses and if your budget allows, annual contributions to this account should be maxed out.
A good rule of thumb as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs, anticipated doctor’s visits and any planned treatments or surgeries. Don’t be afraid to ask your HR representative as you come across questions.
If you are able to afford annual healthcare expenses out of pocket, consider using the HSA as a long-term investment vehicle rather than using it to pay for current year expenses. Instead, treat the HSA like a retirement healthcare savings vehicle in the following manner:
- Contribute the annual maximum to HSA
- Pay for current year expenses out of pocket
- Save all receipts for all healthcare expenses (can do so in electronic format)
- Keep contributing max each year, investing the funds according to your retirement timeline. This allows you to take advantage of tax-free growth. (Note: There are limits on how much needs to stay in cash and then the excess can be invested.)
- During retirement, withdraw the amounts from your HSA to match up with all the receipts you kept for many years. This allows you to withdraw the money tax-free.
As with all investment decisions, the strategy will be dependent on your specific financial situation, and your goals and expectations for the use of the account.
And if you’re turning 65 this year…
Don’t miss the Medicare open enrollment window! You must enroll in Medicare during certain time periods. If you don’t, you may have to pay a delayed enrollment penalty for the rest of your life!
You become eligible during a 7-month period around age 65. You may sign up for Medicare 3 months before you turn 65, during the month you turn 65, or up to 3 months after you turn 65. After this time you may have to pay higher premiums.
If you qualify for auto-enrollment, you will not need to sign up for Medicare Part A or B manually. When you sign up for Medicare Part B, you must also sign up for any supplemental Medigap insurance to cover future needs—even if you don’t plan to use it right now. (Note that the grace period rules are a little different for Medigap.)
If you’re already on Medicare but want to change your coverage…
Medicare Open Enrollment begins October 15 every year and runs through December 7. Visit medicare.gov to review your options.