Are you confused about your choices for paying medical expenses under your employer’s benefit plan? Many people struggle to determine which of their options will provide the best fit, in part because the plans are similar in some ways – but not all. If you’re offered a choice, it will probably include two of the most common types: a health savings account (HSA) and a health care flexible spending account (FSA).
Overview. With an FSA, which is generally established under an employer’s benefit plan, you can set aside a portion of your salary on a pretax basis to pay out-of-pocket medical expenses. An HSA is a combination of a high-deductible health plan and a savings account specifically designated to pay medical expenses not covered by the insurance.
Contributions. The maximum contribution to an FSA is $2,550 in 2016. Typically, you have to use the funds by the end of the year or forfeit that money under what’s commonly called the “use it or lose it” rule. However, your employer can adopt one of two exceptions to the rule.
The 2016 HSA contribution limit is $3,350 if you are single, $6,750 for a family. You can add a catch-up contribution of $1,000 if you are over age 55. You do not have to spend all the money you contribute to your HSA each year. These funds can remain in the account and grow until you need to use them.
Earnings. FSAs do not earn interest. Your employer holds your money until you request reimbursement for qualified expenses. HSAs, on the other hand, are savings accounts, and the money in the account can be invested. Earnings held in the account are not included in your income.
Withdrawals. Distributions from both accounts are tax- and penalty-free as long as you use the funds for qualified medical expenses.
Portability. If you change jobs, your FSA normally stays with your employer. Your HSA belongs to you; the account and the funds in it stay with you no matter where you may work. That’s true even if your employer makes contributions to your HSA for you.
It’s important to understand the differences between these kinds of accounts. In most cases you may not contribute to both accounts in the same year, so you’ll want to examine their respective advantages and choose the one that best fits your circumstances.
After your death your retirement accounts, life insurance policies, annuities and accounts at financial institutions will be governed by beneficiary designations already in place. If those designations are outdated, unspecific or wrong, your assets may not be distributed the way you would like.
All the funds from your retirement accounts, life insurance policies, annuities and accounts at financial institutions are governed by the beneficiary designations in place at the time of your death. If those designations are outdated, unspecific or wrong, your assets may not be distributed the way you would like. Make sure these assets reach the individuals and organizations you choose by following these guidelines for assigning beneficiaries:
Be specific and stay current. If you name a beneficiary, your assets can pass directly to that person or entity without going through a legal process called probate. Remember to update these designations, if necessary, following life events such as divorce, remarriage, births, deaths, job changes and retirement account conversions.
Think about unexpected outcomes. Be alert to the effect of taxes and try to avoid unintended consequences. For example, if the money in your accounts is distributed directly to your heirs, they may be stuck with a large unexpected tax bill. For wealthier heirs, estate tax may also play a role. In 2016, the estate tax exclusion is $5.45 million and the top estate tax rate is 40%. Another concern: If one of your designated beneficiaries is disabled, his or her government benefits may be reduced or eliminated by the transfer of assets. You may want to consult an attorney to establish a special needs trust to ensure your loved one is not adversely affected by your generosity.
Name contingent beneficiaries. If your primary beneficiary dies or is incapacitated, having a backup (contingent) selection named will ensure that your assets are properly distributed. In some cases, a primary beneficiary may choose to disclaim, or waive, the right to the assets. In that case, contingent beneficiaries can step up to primary position.
Practice good record keeping. Keep your beneficiary designation forms in a safe location, and maintain current copies with your financial institution, attorney, or advisor.
Beneficiary designations are an important part of estate planning. If you keep them up to date, well planned and carefully organized, you can be confident that your assets will reach your intended beneficiaries and be a valuable legacy for your loved ones.
