Annual Open Enrollment Tips to Save on 2020 Taxes

by David Kochamba

10/31/19

2019 is flying by, temperatures are cooling down (finally), college football is in full swing and the holidays are rapidly approaching. This also means that the annual open enrollment benefit period will commence soon for those who are currently working.  Many workers dread receiving the annual enrollment email from their human resources team with multiple attachments detailing their benefit options for the upcoming year.  However, a little short-term pain in reviewing your options and determining the benefits appropriate for you and your family can yield tax savings in 2020.

Many employers offer employees a high deductible health care plan (HDHP) and a health maintenance organization (HMO) or preferred provider organization (PPO) plan.  Two benefit accounts that can help pay for medical expenses depending on the medical plan you choose are a Health Savings Account (HSA) and a Flexible Savings Account (FSA).  Those choosing a high deductible health care plan have the option to contribute to a HSA. This is an account that lets you save for future medical costs. Money put in the account is not subject to federal income tax when deposited. Funds can accrue and be used in the year saved or in future years when medical expenses occur.  HSAs must be paired with the High Deductible Health Plan only.  In 2020, an individual with self-only coverage under a HDHP plan can contribute a maximum of $ 3,550 and those will family coverage can contribute a maximum of $ 7,100 to a HSA.

A FSA is a way for employees to set aside pre-tax dollars directly from their paycheck to pay for medical expenses (Medical FSA).  With a HMO or PPO health care plan, individuals were able to contribute a maximum of $ 2,700 to a flexible savings account (FSA) in 2019.  2020 FSA contribution limits have not been announced yet.   It’s important to remember that contributions into a HSA account are not required to be spent in the calendar year made unlike a FSA, where if the funds aren’t spent, you could potentially lose whatever is left in the account at year-end.  If an employer’s health FSA plan has a carryover feature, participants can roll over up to $500 of unused FSA dollars to the next year but will forfeit any excess over $500 at year-end. An optional grace period gives employees an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period, all unspent funds must be forfeited.  Plans can offer either the carryover feature or a grace period, but not both.  As a result, it’s important to carefully estimate your out of pocket medical expenses before submitting your contribution amount.   Both HSA and FSA contributions are funded with pre-tax dollars and are exempt from the 7.65% Social Security and Medicare tax, reducing your taxable income.

Many employers will also offer their employees a dependent care FSA.  This is a pre-tax benefit account used to pay for dependent care services while you are working.  For 2019, the maximum contribution amount is $ 5,000. To be eligible for a dependent care FSA, you and your spouse (if applicable) must be employed, or your spouse must be a full-time student or looking for employment.  Funds can be used to pay for care of children under age 13 when they’re claimed as qualifying dependents.  A dependent care account covers a number of services, such as preschool, summer day camp, before- and after-school programs, and childcare.  It’s important to note that like a flexible savings account for healthcare, any balance remaining in the dependent care account at year-end will be lost if not spent.

It’s not too early to start thinking about what benefits are most suitable for you and your family.  Planning now will enable you to be a little less stressed when you are given your deadline to make your final benefit decisions for 2020. Knowing you will be saving money on your 2020 taxes may just change your mindset on receiving your annual open enrollment e-mail in future years.  Below, please find a summary chart of HSA and FSA plans.  Here’s to you saving money in 2020.

 

Health Savings Account (HSA) Flexible Spending Account (FSA)
Who owns? Employee Employer
Who contributes? Employee and/or employer Employee and/or employer
Contributions Via payroll deduction, check, or transfer Via payroll deduction only
Must be enrolled in a HDHP? Yes No
Can funds rollover from year over year? Yes Up to $500 can be rolled over depending on the plan
Are funds portable if you change jobs? Yes No
Do funds accrue interest? Yes, depending on the plan No
Can funds be invested? Yes No
Do I have to submit receipts or documentation? No, but the account holder should keep receipts in the event of an audit Yes, receipts are typically needed for reimbursement
Contribution limit For 2019 – Self-only: $ 3,500; Family: $ 7,000; Catch-up contributions $ 1,000 (age 55 and older) For 2019 – Health FSA: $ 2,700; Dependent Care FSA: $ 2,500 or  $ 5,000 depending on tax filing status