Connections for Success



How Tax-Advantaged Health Plans Contribute to Your Financial Well-Being
Jacqueline N. Janczewski

You have likely heard of these common tax-advantaged health care plans: Flexible Spending Arrangements (FSAs), Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). But do you know what they offer and, given your specific health and financial concerns, which one might be the best fit for you?

Paid with pre-tax dollars

The primary advantage of an FSA is that it allows you to pay for qualified medical expenses with pre-tax income, thereby reducing your tax bill. You can fund an FSA through a voluntary salary reduction and your employer can also make contributions. Neither federal income taxes nor Social Security or Medicare taxes are deducted from contributions. For 2019, you can contribute up to $2,700 to an FSA.

At the beginning of each 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. Your employer may provide a grace period of up to two and a half months — or allow you to carry up to $500 into the following plan year.

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

Contributions excluded from income

Employers are the sole funders of HRAs and they can contribute to them as much as they would like. HRA contributions are not included in your taxable income and, as with FSAs, HRA distributions used to reimburse for qualified medical expenses are not taxed. Unused amounts in an HRA can be carried forward.

However, there is one downside to HRAs: If you are self-employed, or a partner or S corporation shareholder, you are not eligible to use them.

Tax-exempt and more

An HSA is a tax-exempt account used for qualified medical expenses. You can establish one with a qualified HSA trustee, such as a bank or insurance company.

You, your employer, family members and others can contribute to your HSA. For 2019, contributions are limited to $3,500 if you are an individual with self-only health care coverage. If you have family coverage, you can contribute up to $7,000. And, if you are 55 or older by the end of the tax year, you can add an additional $1,000 to your HSA.

HSAs offer several benefits. For example:

  • You can make contributions with pre-tax dollars;
  • You are allowed to invest 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 are not taxed;
  • Contributions can remain in your account until you need to use the money; and
  • HSAs are portable so you can take yours with you if you change employers or quit your job.

Another advantage? You can contribute to your HSA until the tax return deadline, even if the contribution is for the prior year.

Beware of restrictions

If you are interested in opening an HSA, you should be aware of several restrictions. You must be covered under a high deductible health plan (HDHP). For 2019, 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 cannot exceed $6,750 for self-only coverage and $13,500 for family coverage. HSA distributions that are not used for qualified medical expenses are subject to income tax.

In addition, you cannot be claimed as a dependent on another person’s tax return. In most cases, you (and your spouse, if you have family coverage) cannot be covered under another health plan, including Medicare. If you would like to continue contributing to an HSA after you are eligible for Medicare, you need to delay enrollment. This could expose you to penalties.

Non-health factors

Although FSAs, HRAs and HSAs are health savings plans, be sure to consider non-health factors, such as your tax exposure and other potential uses for your money, when deciding whether to participate in one. Consult your employee benefits manager and consider seeking outside financial advice.

For more information, contact Jacqueline Janczewski at [email protected] or 312.670.7444. Visit to learn more about our Wealth Management Services.

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