The New Year often brings about new pledges for a healthier lifestyle, but it also ushers in changes on how we will pay for health care.
Consumers who use tax-advantaged health savings accounts and flexible spending accounts should plan for new changes in 2013 that could cost them more money.
“A lot of measures like raising rates and putting caps will make more money for the health-care system to absorb the influx in 2014” when the health reform act goes into effect, explains Michael Mahoney, vice president of consumer healthcare marketing website gohealthinsurance.com. “For big users of FSAs, that’s bad news.”
Flexible savings accounts or FSAs are typically sponsored by employers and enable employees to save money by allotting money to qualified medical expenses before taxes. The only down side is that if you don’t use the money set aside by the end of the year, you lose it. People with FSA accounts typically use their pre-tax money for things like prescription drugs, medical supplies and contacts and this type of savings plan is ideal for people with a good sense of their annual medical expenses.
This year, FSA accounts will be capped at $2,500, which covers many consumers’ spending, but those suffering with an expensive, chronic illness, stand to lose out, says Mahoney, and will have no alternative but to pay taxes on it. “A fringe group will see their benefit shrink and taxes go up. By 2014 one way or another they will be paying a lot more.”
In addition to the cap, the amount of medical expenses you can claim on your tax return also changes in 2013. In the past, qualified medical expenses that were over 7.5% of your adjusted gross income could be deducted, now that rate stands at 10% of your income, according to Mahoney.
The new year also brings changes to users of health savings accounts. A HSA is a tax-advantaged savings account that’s used in conjunction with an eligible high deductible insurance plan that allows you to deposit a certain amount of money each year on a pre-tax or tax deductible basis and use the money for qualified medical expenses. Unlike with a FSA account, you don’t lose the money at the end of the year if you don’t use it--it rolls over from year to year and can earn interest on a tax-free basis.
According to Keith Mendonsa, group specialist at ehealthInsurance.com, the minimum annual deductible for a HSA plan is going up to $1,250 in 2013 from $1,200 for individuals and $2,500 from $2,400 for families.
He adds that some existing HSA eligible plans may no longer qualify in 2013, and suggests checking your plan to make sure it still meets the minimum deductible to qualify for a HSA account. If your current plan no longer meets the deductible, check with your insurer or human resources department to see if there is another plan available that will meet the new requirements. Mendonsa also notes that some health insurance companies may be raising deductibles on their HSA plans automatically to make sure you’ll still qualify.
Not every change is bad news: As is the case pretty much every year, the amount you can contribute to a HSA tax free increases this year. According to Mendonsa, the maximum contribution will be $3,250 for individuals and $6,450 for families, a $150 and $200 increase respectively.
“Fund your HSA to the max every year if you want to take full advantage of your HSA over the long term,” says Mendonsa. “Remember, money saved in your HSA can be invested to grow year over year and is yours to keep. So long as you save that money for qualified medical expenses, you’ll never pay taxes on it.”