IRS announces higher health savings account limits for 2014
Many individuals rely on tax-advantaged medical accounts - such as health savings and flexible spending accounts - to manage their out-of-pocket healthcare spending. In 2014, individuals who use HSAs to cover these costs will enjoy higher contribution limits, the Internal Revenue Service recently announced.
The contribution limits for HSAs will increase to $3,300 for individuals with self-coverage only, up $50 from the 2013 limits. Those with family coverage will see contribution limits increase to $6,550, a $100 increase from this year. As these accounts are typically paired with high-deductible health plans (HDHPs), the IRS also released new thresholds for minimum annual deductibles and out-of-pocket maximums. The minimum annual deductible for HDHPs is $1,250 for self-only coverage and $2,500 for family coverage. HDHP out-of-pocket maximums - including copayments, deductibles and other amounts, but not premiums - are $6,350 for self-only coverage and $12,700 for family coverage.
As individuals try to navigate the coming changes to the health care industry and the full implementation of the Affordable Care Act, many are turning to tax-advantaged accounts as a way to plan ahead for out-of-pocket health costs. The two most common medical accounts individuals rely upon are flexible spending accounts (FSAs) and HSAs.
Differences between the two accounts
Both FSAs and HSAs have their benefits and drawbacks, and it's important for individuals who are eligible for enrolling in one of these accounts to understand the differences.
First, not all people qualify for enrollment in HSAs, as these accounts are only open to those participating in an HDHP. Another significant point to understand is that money contributed to an HSA rolls over from one year to the next, allowing individuals to accrue large sums to cover qualifying out-of-pocket medical expenses, such as prescriptions, eye glasses and medical equipment. Because the funds never expire, many older individuals also consider HSAs to be an asset during retirement planning, namely because they can build the account to cover costly medications and other medical necessities they may need as they age.
In contrast, FSAs are typically offered with traditional medical plans, as opposed to HDHPs. They function similarly to HSAs in that the funds contributed must be used to cover qualifying medical expenses and contributions to the account are made with pre-tax money. However, FSAs are a considered a spending, rather than a savings, account, and all money deposited must be used before the plan year is over, otherwise the funds will be forfeited. Therefore, it's important for individuals to plan accordingly before investing money into these "use it or lose it" accounts.
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