(USA Today) -- Going through open enrollment? Want to save on your taxes at the same time? There's a way to do that.
Health savings plans and flexible spending accounts become available to you based on what kind of health plan you sign up for, but both let you sock away pretax dollars for future medical costs.
While there are benefits to both types of savings accounts, there are also important differences to keep in mind. You have to be enrolled in a high-deductible plan to be eligible for a health savings account. That means your insurance has a minimum deductible of $1,250 as an individual or $2,500 for a family. If that's the case, you'll be able to opt into a health savings plan.
And you should, say tax and human resource professionals. "If you're in the high-deductible plan, certainly you should open your (health savings account)," says Jackie Perlman, principal tax research analyst with H&R Block's Tax Institute. "Put something in it. You can't mess it up."
The plan lets you designate a certain amount of your paycheck to be funneled into the account pretax. The funds can then be used for any qualifying medical expense, from surgery to prescriptions. An individual can contribute up to $3,300 a year, while a family can give a maximum of $6,550. The funds also roll over year-to-year, so you never lose the money. And sometimes your employer will make a contribution to the account, just like with a 401(k).
Even if you don't usually have high medical expenses throughout the year that you think you'll need HSA funds for, the account can be used strictly as a way to build up savings and reduce your taxable income.
"I like to think of it as a medical IRA," says Lenny Sanicola, senior practice leader for benefits at World at Work, a human resources association. He adds that many people will choose to use a health savings account to save up for medical expenses during retirement. Plus, once you turn 55 you can contribute an extra $1,000 a year into the account.
But if you're saving the money for later, keep in mind it still has to be used for medical expenses. There's a 20% penalty for using HSA or FSA funds for non-qualified expenses, Perlman says.
FLEXIBLE SPENDING ACCOUNTS DON'T ROLL OVER
A flexible spending account offers the same savings and pretax benefits as an HSA, but to someone in a higher cost health plan - one with a higher premium and lower deductible. It essentially works the same as an HSA, but you can't contribute as much money to it - a maximum of $2,500 a year - and the funds don't roll over if you don't use them. They get absorbed back into your company's fund. Determining how much money to put into your FSA requires a more calculated assessment, Perlman says.
"When I sign up for benefits I've got to get a pretty good estimate of what I think my 2014 expenses will be and pretty much contribute just that," she says, or risk losing what's left over at the end of the year.
Both an FSA and HSA will pay off when it comes to your taxes, though. Perlman gives this example of how much money you could save in tax benefits: If you make $2,000 a month and designate $100 a month to your FSA or HSA, you are taxed as if your income were $1,900 for the month. Over a year, your taxable income is $1,200 less than it would have been, and that $1,200 is in your medical savings account instead. While your specific savings will depend on your tax bracket, someone in the 25% tax bracket will have saved $300 ($1,200 x .25) in taxes, meaning it ultimately cost $900 to save the $1,200 in the FSA or HSA.
Unlike an FSA, a health savings plan has more flexibility built in: You can contribute money to the account after taxes in addition to designating a certain amount be taken from your paycheck at the outset. You'll still get the tax savings by being able to take a deduction on your tax return, Perlman says. It's a strategy that can be used to put away more savings if you find you're more flush than expected at the end of the year. Or if a medical expense arises that you don't have enough money in your HSA to cover, you can immediately add more and then withdraw it and still get the tax savings, she says.
ALWAYS KEEP GOOD RECORDS
Both plans will often come with a debit card loaded with your funds to use for payment. A health savings plan will only let you use what is actually in your account at that point in time though, while a flexible spending account will let you spend up to your designated amount for the year even if the money hasn't been deducted from your paycheck yet. Either way, keep track of what you're using the funds on, says Bruce Elliott, manager of compensation and benefits at the Society for Human Resource Management.
"With both plans you have to be very very careful about maintaining receipts and records," he says. With an FSA in particular, even if your account comes with a debit card, you'll often still have to substantiate expenses by submitting receipts. "Otherwise your provider will turn off the card," Elliott says.
Employees enrolled in a high-deductible plan with a health savings account also have the option to contribute to a "limited purpose FSA," Perlman says. The account generally can only be used toward dental and vision expenses that aren't covered by insurance, or if you don't have dental or vision insurance at all. Although an HSA can also be used to cover dental and vision costs. So Perlman acknowledges that, "A lot of people do say, 'Why bother with this?' It just depends. People may want as much pretax savings as possible."
And that's ultimately the primary benefit of all of these plans, Sanicola says.
"Mostly for the tax benefit, that's pretty much why you do these things and why the employer offers it, too," he says. "A pretax contribution is in a sense a salary reduction. From an employer perspective, when I file income taxes and report less payroll dollars," a lower overall payroll means a lower tax liability for the company.