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HSA Taxes, FSA Taxes & How They Work in 2019 and 2020

If you have medical bills to pay, you might as well at least get a tax break.
Nov. 7, 2019
Health, Income Taxes, Managing Health Insurance, Managing Medical Bills, Medical Costs, Personal Taxes, Taxes
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Medical expenses can take a big bite out of your wallet. But two special accounts — the flexible spending account (FSA) and health savings account (HSA) — can be good remedies for both your doctor and tax bills.

As with all things tax, there are exceptions and special rules for certain situations. You can find more in IRS Publication 969. If you have additional questions, talk with your company’s human resources or benefits department.

What is a flexible spending account (FSA)?

A flexible spending account (FSA) is a workplace account you can use to pay for certain medical costs that come out of your own pocket, such as insurance copays, prescriptions and other items needed to meet your health policy’s deductible. You contribute to the account as a payroll deduction from your salary, and in return the IRS agrees not to tax that portion of your salary.

What is a health savings account (HSA)?

A health savings account (HSA) is an account you can use to pay a variety of medical costs. Only people with a qualifying high-deductible health plan are eligible. The contributions to an HSA are tax-deductible, and the account’s earnings (if invested) are tax-free, as are withdrawals for eligible medical expenses.

2019 and 2020 FSA contribution limits

The IRS establishes the maximum you can contribute to an FSA each year based on inflation.

  • For 2019, the FSA contribution limit is $2,700, which comes out to about $225 per month.
  • For 2020, the FSA contribution limit is $2,750, which comes out to about $229 per month.

2019 and 2020 HSA contribution limits

The maximum amount you can contribute to your HSA also depends on inflation, as well as the type of high-deductible insurance policy you have.

  • For 2019, the individual coverage contribution limit is $3,500 and the family coverage limit is $7,000. If you’re 55 or older, you can put an extra $1,000 in your HSA.
  • For 2020, the individual coverage contribution limit is $3,550 and the family coverage limit is $7,100.

How do I contribute to an FSA or HSA?

FSA contributions

  • Once you set up your flexible savings account at work, the contributions automatically come out of your paycheck and go into your account each pay period.
  • Good news: the money is contributed before tax, so your payroll tax bill should be a bit smaller.

HSA contributions

  • If your health savings account is based on a high-deductible health plan you get through work, your employer might set up payroll deductions on your account, meaning the money will go into your health savings account tax-free.
  • If you make HSA contributions directly, you may be able to claim a tax deduction for that amount when you file your tax return. You don’t have to itemize to claim the HSA deduction.
  • If you’re looking for a last-minute way to cut your tax bill, note this: You have until the annual April tax-filing deadline to put money into an HSA for the prior tax year.

How do I access the money in my FSA or HSA account?

  • With an FSA, typically you either use a debit card tied to the account, or you pay out of pocket and then submit receipts to the FSA administrator so you can get reimbursed. Using an FSA debit card is usually easier, but remember that you may be asked to provide receipts to prove your purchases were eligible medical expenses.
  • With an HSA, you’ll likely receive a debit card linked to your HSA account. Along with other annual tax forms, your HSA manager will issue a Form 1099-SA showing distributions from the account. Keep receipts and documentation of what you spent the money on, in case the IRS questions your tax deduction.

What if I don’t use all the money?

FSA

  • The major drawback of an FSA is that it is a use-or-lose plan. If you end up having a healthy year and have money left in your FSA at the end of the benefits period, your employer gets the excess money.
  • Good news: Some workplaces offer rollover options (limited to $500 by IRS rules) or a few months’ grace period (sometimes to mid-March) to spend FSA funds, but they are not required to do so.

HSA

  • HSA money is yours — there are no deadlines to withdraw funds, even if you no longer have the same high-deductible health plan. You can even invest your HSA money in mutual funds or other financial instruments, and the money can continue to grow tax-deferred and be used tax-free to pay for qualifying medical expenses at any time.
  • Use HSA money for medical reasons, though. If you’re under 65 and use the funds for other purposes, that money becomes taxable income, and you could face an additional 20% tax on the nonmedical use of HSA money.
  • Once you turn 65, you can use HSA money for anything, but you’ll owe tax on withdrawals that aren’t used to pay medical expenses.

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