Now is the time to begin planning to take full advantage of their employer’s health flexible spending arrangement (FSA) during 2016. There are several differences between the 2015 and 2016 HSA rules that employees in eligible HSA plans should be aware of.
What are FSAs and HSA?
In tax year 2016, FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans or other health insurance. It is important to think ahead because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, many employers this fall are offering their employees the option to participate during the 2016 plan year. It is normal make 2016 HSA elections during open-enrollment in 2015.
Contributing to an FSA and HSA
Interested employees wishing to contribute during the new year must make this choice again for 2016, even if they contributed in 2015. Self-employed individuals are not eligible to make contributions to FSA accounts. This is a benefit that must be administered by an employer. It is important to check with your employer to see if the offer this type of health care tax benefit.
2016 HSA Contribution Limits
An employee who chooses to participate can contribute up to $2,550 during the 2016 plan year. This amount has slightly increased since 2015 due to inflation It is very beneficial for an employee to contribute for several reasons. First, amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA. This is a good benefit to have.
Maximum HSA Contribution Limits
Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures. There are many different uses for funds in an HSA. However, there is one important catch when using these medical expense accounts.
Using HSA Funds for Medical Expenses
Under the use or lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option. It is important to check with plan specifics to see how you must use funds in an FSA, HSA, HRA, MSA or other tax qualified medical expense account.
Carry Over Option for HSA
Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year—for example, an employee with $500 of unspent funds at the end of 2016 would still have those funds available to use in 2017. Under the grace period option, an employee has until 2½ months after the end of the plan year to incur eligible expenses—for example, March 15, 2017, for a plan year ending on Dec. 31, 2016. Employers can offer either option, but not both, or none at all. Again, very important to check with your employer over the specifics of the plan that they are offering.