Estimating medical costs for 2018:  Part 1 – HSAs and FSAs

It’s that time of year again – annual “open enrollment” for next year’s benefit plans! Most American employees who get their healthcare coverage through their employer will be enrolling in 2018 benefits this month or next. For many of you, that includes estimating out-of-pocket medical costs for the coming year so you can make sure the contributions to your Health Savings Account (HSA) and/or Flexible Spending Account (FSA) are as accurate as possible.

Obviously, none of us can predict if someone in our family will have an accident or be diagnosed with a disease that requires ongoing treatment. But there are some costs that you can predict for the coming year. Accounting for them at enrollment time allows you to set aside a more accurate amount of pre-tax dollars to cover those expenses.

In my previous job before Alliant, I edited the company's benefits enrollment materials, and I know that one of the things that most confused employees was the difference between HSAs and FSAs. Below, I’ll explain what HSAs and FSAs are and what they may or may not cover. Thursday, in Part 2 of our Open Enrollment series, we'll review a few of the costs to consider when estimating your HSA and FSA contributions for next year.

Please note:

• For the purposes of this article, we are discussing only cost estimates for HSA and FSA accounts through employer-provided benefit plans for current employees. COBRA plans are different, so if you have been laid off, the limits and rules below may not apply to you, and you’ll need to consult your COBRA plan documents. Similarly, if you are self-employed or don’t get health coverage from your employer, your coverage options may be different. Healthcare.gov provides guidance on the process of pricing medical policies if you are not covered by an employer healthcare plan.
• Medical coverage varies widely from one medical plan to another. Although the information below provides tips on some of the general categories of expense you may incur, it is in no way an all-inclusive or universal list of all potential medical expenses for all plans. Carefully review the information provided to you by your company’s benefits team so you can more accurately estimate the potential expenses you’ll face under your particular plan. 

What's a health savings account (HSA)? 

An HSA is a pre-tax spending account available only to someone enrolled in an eligible high-deductible health plan (HDHP) who has no other health insurance coverage. You contribute pretax funds into your HSA to cover your plan’s deductible and other eligible medical expenses not covered by your HDHP. If you don’t use all your contributions during the year, you can keep the remaining dollars to use for future eligible medical expenses. IRS rules set these 2018 contribution limits:

• Up to $3,450 for an individual
• Up to $6,900 for a family
• Employees 55 or older may contribute an additional $1,000

The limits listed above include any employer-paid contributions or matching funds, if your company offers them. For example, if your company contributes $500 into each employee’s HSA, you can personally contribute only $2,950 for individual coverage or $6,400 for family coverage (or $3,950 and $7,400 if you are over 55).

What's a flexible spending account (FSA)? 

FSAs are spending accounts that let you set aside pretax funds to get reimbursed for eligible medical expenses. They are not offered in tandem with a specific type of coverage (like HSAs are offered only in tandem with HDHPs). The IRS allows a maximum of $2,600 in annual pre-tax contributions into FSAs in 2018. Until 2014, FSAs were “use it or lose it” accounts, and any funds not used by the end of the calendar year were forfeit, but those rules have changed, and companies now have the option to allow carryover dollars. However, it is up to the company to decide if they’ll offer the carryover option and what amount you are allowed to carry over. So your employer may not allow any carryover at all, which means that you need to consult your company’s benefits materials to find out what your plan allows.

Limited Purpose FSAs. Please note that if you have an HSA, the IRS still allows FSA contributions, but only to a Limited Purpose FSA:

• Employers choose whether to offer this option or not, and if they do, FSA contributions may be used to reimburse only dental, vision, and preventative expenses.
• Depending on your financial circumstances, you may not want to contribute to a limited purpose FSA even if it is offered to you.
• Many employees choose not to enroll in their company’s limited purpose FSA unless they’re maxing out their HSA contribution and expecting annual expenses that will exceed their HSA balance.
• If you're using your HSA as part of a strategy to build long-term, tax-free savings, you'll likely want to max out your HSA contribution and also contribute to your limited-purpose FSA for any anticipated vision and dental expenses. By maximizing the amount of pre-tax contributions using both accounts, you'll lower your taxable income and end up with more dollars growing tax-free in your HSA for future medical needs.*

Deciding on your per-pay-period contribution amount

Flexible Spending Account contributions are usually evenly split across all paychecks you receive during the year, so there really isn't a decision to make about how much to contribute per paycheck. Most FSA plans make your entire enrollment amount for the year available to you on January 1 so you can submit FSA claims and be reimbursed right away, even if you haven't contributed that many dollars yet. For example, if your annual FSA contribution is $1,300 and you get paid biweekly, you contribute $50 per paycheck into your FSA. But let’s say you incur $500 in eligible medical costs on January 28. At that point, you’ve only contributed $100 into your FSA. But you can still submit the $500 claim and be reimbursed right away, even though you haven’t yet contributed $500.

Health Savings Accounts, however, work differently. If you incur $500 in medical expenses in January, you can only be reimbursed for the expense if your HSA balance is $500 or more. If you have a balance carried over from the previous year or if your employer provides a company match as a one-time lump sum deposit in January, you'll be golden. But what if neither of these scenarios applies to your HSA and you don't want to wait for reimbursements? You can still ensure that you’ll be reimbursed in a timely manner by front-loading your HSA contributions to fund the account earlier in the year. For example, if you were contributing $1,200 to your HSA for 2018, instead of contributing $100 each month, you could contribute $300 in January, February, March and April. Your HSA would then be fully funded earlier in the year and you won't have to wait as long to be reimbursed. 

Should you pay your insurance on a pre-tax or post-tax basis?

Generally, using pre-tax dollars to fund medical costs is advantageous in terms of taxes, as it lowers your taxable income. There are situations, however, when tax savings can be realized by paying medical insurance and out-of-pocket medical expenses with post-tax dollars and then claiming the medical expenses as an itemized deduction on your taxes. The year I was treated for cancer, for example, I would have paid less taxes if my insurance premiums were deducted after taxes with no FSA enrollment. Instead, I paid my premiums with pretax dollars and used pretax FSA dollars to cover the first few months of my out-of-pocket medical costs.  

The total of my medical expenditures – premiums, copayments, prescriptions, the costs of travel to and from treatment and the cost of my wig – would have far exceeded 10% of my income, which is the IRS threshold for deducting medical expenses as itemized deductions. But because my premiums were paid on a pretax basis and my non-FSA-reimbursed expenses didn't total 10% of my income, I ended up paying a chunk of my out-of-pocket cost with post-tax dollars. I hadn't enrolled that way because I didn’t anticipate being diagnosed with cancer (who does?!). But if you or someone in your family has a chronic illness or you anticipate high medical expenses in the coming year – continuing costs from an injury that happened this year, an upcoming surgery, braces for you or your child, etc. – it may be worth your time to crunch the numbers and talk to your tax advisor to figure out if post-tax enrollment would be beneficial in terms of taxes. 

Do you have previous HSA contributions left over?

If your HSA has a significant amount of funds in it already, you could choose to lessen the amount of your 2018 contributions. For example, let’s say that the calculations you made of potential 2018 expenses show that the most you would have to pay out of pocket is $3,000, so you want to fund your HSA at that amount. If you still have $1,200 of your 2017 HSA dollars left, you may decide to only contribute $1,800 to your 2018 HSA so you’d end up with $3,000 total. Please note: When making this decision, you need to keep in mind that 2017 isn’t over yet, and you could have more 2017 medical expenses. You’d then have less than $1,200 left in your HSA at the end of the year.

Check back tomorrow for Part 2, discussing some of the types of expenses you need to include in your calculation of potential 2018 medical expenses.

*Consult your tax advisor to discuss tax implications. 

Pam Leibfried is a marketing content specialist whose love of words led to a writing and editing career. After a brief stint teaching English, she transitioned to corporate communications and spent 20 years at The Nielsen Company before joining Alliant’s content development team. Early in her work life, Pam’s friend Matt explained the benefits of a 401(k) and her dad encouraged her to start a Roth IRA. Their good counsel prompted her to prioritize retirement savings, which just might enable her to retire early so she can read more and live out the slogan on her fave T-shirt:  “I have a retirement plan: I plan on quilting.”