How much do you actually save with reimbursement accounts?
You’ve likely heard that reimbursement accounts can help you save on tax, but it may not be clear how that impacts your finances. Here are some ways you will see a tax-saving benefit:
Payroll Deduction Contributions
Reimbursement accounts such as Healthcare Flexible Spending Accounts (HCFSAs) and Health Savings Accounts (HSAs) can be part of a Section 125 Plan. Section 125 is a part of the Internal Revenue Code that allows specific employee benefits to be paid for pre-tax. So, for reimbursement accounts, the dollars you contribute come out of your paycheck before income tax is taken out. This results in your income tax being lower than it would if you didn’t contribute pre-tax. Watch the following video for a detailed explanation about how pre-taxed benefits can save you money:
Paying for Eligible Medical Expenses
Some may confuse “saving on tax” with saving on sales tax. While you don’t save on sales tax, you are still saving money indirectly when you use your reimbursement account to pay for these items. Because you contributed the funds to your account tax-free, this means you saved money when you initially put it in your account.
Think of it this way: Let’s say a box of Band-Aids is $10.00 at the pharmacy. It is the same price at the store regardless of how you pay for it. However, if you use your FSA funds, you didn’t pay income tax on the funds you are using to pay for the purchase. You are taxed around 22% on your income, so if you hadn’t contributed that $10.00 to your FSA, you would have paid around $2.20 out of your paycheck on income tax (around 22%). This means your take-home pay would have been $2.20 less.
Saving for Retirement
When you invest your HSA funds, the growth is tax-deferred, similar to an IRA. This means that all the interest, capital gains, or earnings from your HSA are not taxable as long as they are in the account. HSAs are one of the only accounts that provide tax-free distribution of account growth on your investments, if certain conditions are met.
This blog is up to date as of May 2020 and has not been updated for changes in the law, administration or current event.
Related Reimbursement Account Articles
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When you leave a job, you may have questions about what happens with your Dependent Care Account (DCA).
Are you contributing enough to your HSA each year? There are several strategies to consider when deciding how much to contribute to your account.