Health Savings Accounts, or HSA's, offer a triple-tax advantage, according to John Bull, of Alegeus Technologies. The money put in is tax-free, the money taken out for qualified expenses is tax-free and any interest or earnings are tax-free, making HSA's a very attractive vehicle that should be looked at as a savings vehicle, not a spending vehicle.
An HSA is set up to pay for healthcare costs and if one did accumulate money over time, they can pay themselves back in retirement as long as they have history and receipts to substantiate the expenses. If they have expenses they haven't used their HSA for, there's a tax penalty similar to taking money early of out a 401k, Bull says.
In contrast to an HSA, an FSA, or Flexible Savings Account has a cap on annual contributions to a flexible spending account and is part of an employer offering. Money is set aside from your paycheck and if you leave that employer and haven't spent that money, you lose those funds, Bull says. He adds that the IRS has put a new program in where $500 will remain at the end of the year to be rolled over from year to year if you stay with that employer.
The main difference between and HSA and FSA is that if you leave your employer, with an HSA, that money stay with you and there's no rollover, because an HSA is yours, similar to a checking or savings account.
As an employer, HSA's are attractive so they can offer program that can save an employee money but also gives ways for an individual to compensate for any additional expenses incurred. Additionally, the money that goes into an HSA or FSA through payroll deductions is done is taxable income, which is then reduced, so the employer benefits as well.
John Bull is with Alegeus Technologies and spoke with Retirement News Today, providing online, on-demand, retirement news video content. Retirement News Today is a featured network of Sequence Media Group.