’Tis the season—benefits season, that is. The few weeks from mid-November to mid-December tend to mark benefits season for the federal government and many companies. During that time, you can typically enroll in a new plan, change your existing plan, add or drop beneficiaries, and adjust coverage for your healthcare, dental, and vision insurance plans. You can also elect to contribute to various tax-favored plans intended to help you pay out-of-pocket expenses.
Here’s how those plans can help save you money. Under section 213 of the Tax Code, taxpayers can deduct expenses paid during the taxable year for medical care if certain requirements are met. Realistically, however, most taxpayers no longer deduct medical expenses. To deduct those expenses, you have to itemize on your Schedule A. But most taxpayers don’t itemize—more than 90% of filers in the 2020 tax year opted to claim the standard deduction.
But there’s one more hurdle: the medical expenses floor. You can only deduct your total medical expenses that exceed 7.5% of your adjusted gross income (AGI). For example, suppose your AGI is $100,000, and you have $10,000 in total medical expenses. In that case, you can only deduct $2,500—the difference between your expenses ($10,000) and 7.5% of your AGI ($7,500). That likely explains why just under 2.4% of taxpayers who filed for the 2020 tax year (the last year for which a complete data set is available) claimed the medical expense deduction.
So what’s the alternative? You can contribute to health savings accounts (HSAs) and flexible spending accounts (FSAs) with pre-tax dollars, and you don’t need to itemize to see the tax savings. (You can also contribute to or roll over an existing Archer MSA plan–also called an Archer medical savings account plan–or a health reimbursement arrangement, known as an HRA, though these lesser-known plans have largely been replaced.)
An HSA, or health savings account, is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using money that isn’t subject to tax to pay for expenses, you can lower your out-of-pocket health care costs.
While you can use the funds in an HSA at any time to pay for qualified medical expenses, you can only contribute to an HSA if you have an HSA-eligible plan (sometimes called a High Deductible Health Plan, or HDHP). For 2024, HDHP has an annual deductible of at least $1,600 for self-only coverage or $3,200 for family coverage. The yearly out-of-pocket expenses—deductibles, copayments, and other amounts—for those plans cannot exceed $8,050 for self-only coverage or $16,100 for family coverage.
In 2024, the annual HSA contribution limit for taxpayers with self-only coverage under a high-deductible health plan is $4,150 (up from $3,850 in 2023). The annual HSA contribution limitation for taxpayers with family coverage under a high-deductible health plan is $8,300 (up from $7,750 in 2023). The HSA catch-up contribution (for those taxpayers ages 55 and older) did not change—it’s not subject to cost-of-living adjustments. It remains $1,000.
Funds in an HSA grow federal income tax-free. And when you take them out? Distributions for qualified medical expenses are not taxable for federal income tax purposes.
An HSA is also portable, meaning you can keep it even if you change employers, retire, or otherwise leave the workforce. If you don’t spend your HSA funds, you can roll the funds from year to year—you don’t have to use them all in one year. That allows you a great deal of flexibility, including saving for medical expenses in retirement. One more twist: once you reach retirement age, you can treat an HSA like a retirement savings account (you’ll pay tax on withdrawals, but they won’t be subject to a penalty).
You and your employer can contribute to your HSA in the same year. If family members or other folks want to contribute on your behalf, that’s okay, too, subject to contribution limits.
An FSA, or flexible spending account, also lets you set aside pre-tax money to pay for healthcare costs. And, as with HSA, withdrawals are tax-free if you use them for qualified medical expenses.
But unlike an HSA, an FSA is a “use it or lose it” plan, meaning that you must spend your funds each year or lose them, you can roll over your HSA contributions from year to year and continue to save.
(You can have both—subject to some limitations. If you have an HSA, you can add a limited purpose FSA, also known as an LPFSA, which covers only those expenses not covered by your health plan, such as dental and vision care.)
It sounds like a great deal–but the catch is that figuring out what expenses qualify under these plans can be confusing.
FSA-eligible expenses can vary by plan. However, typically, qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction–that same section 213 noted above. But, since most taxpayers don’t tote a pocket tax code with them, you can generally think of qualified medical expenses as the cost to get better.
According to the IRS, medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. This now includes over-the-counter medicine (whether or not prescribed) and feminine hygiene products, thanks to the CARES Act.
You can even include big-ticket items like treatments to lose weight, but only for a specific disease diagnosed by a physician, such as obesity, hypertension, or heart disease. While you can’t include membership dues in a gym, health club, or spa as medical expenses, you can include separate fees for weight loss activities.
However, you can’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.
You can find a laundry list of what’s included–and what’s not–in IRS Pub. 502.
If all of this feels confusing, you’re not wrong. Taxpayers often struggle to figure out what’s included. To help, traditional pharmacies like CVS issue register receipts highlighting items that are HSA and FSA-eligible–they also mark those items as HSA and FSA-eligible on their website.
Not-so-traditional companies are also getting in the game. Apothekary, a plant-based medicine and supplement company, aims to change views on wellness and change minds about the usefulness of tax-saving HSA and FSA accounts along the way.
The company pairs Eastern medicine practices with Western healthcare, offering natural alternatives to over-the-counter drugs and products–some of which qualify as medical expenses for health savings accounts (HSAs) and flexible spending accounts (FSAs).
Shizu Okusa founded Apothékary in 2019 and has since expanded its business beyond the U.S. to more than 22 countries worldwide. Okusa worked for years as a trader and proprietary investor at Goldman Sachs’ Bank Loan Distressed Investing Desk in New York City, but after realizing that Wall Street wasn’t for her, she moved back to Mozambique—her family spent time there previously—where she volunteered for 14 months helping small and medium-sized enterprises and farmers raise capital. She next moved to Bali, where she eventually got her Ayurvedic medicine health coaching certificate, before realizing, she said, that it was time to move back to the U.S. This time, her destination was Washington, D.C., where she worked at IFC Asset Management Company.
She made juices in her spare time, and colleagues kept asking for more. The asks grew bigger, and in 2012, she launched and bootstrapped JRINK, DC, Maryland, and Virginia’s largest cold-pressed juice brand. She then scaled and sold the company in mid-2019.
Okusa continued to be inspired to live a more balanced life, revisiting her Japanese roots and her passion for herbal medicine. She began questioning some of the practices she saw in the U.S. “Why is everything in plastic?” she wondered, adding, “And why don’t we recognize this?” She became determined to bring Eastern medicine and practices to the U.S. Her goal was to enhance health and well-being naturally yet effectively.
Her first herbal formulas were hand-packed into small, black packages and narrow-mouthed glass bottles. Okusa screwed on thousands of lids herself and even used her hair curler to seal and secure the black pouches. It was, she says, important that she paired her products with education so that the company would be taken seriously. Eastern medicine isn’t, she notes, easily accessible in the U.S., and she needed to prove that it was “not just powder in a bottle.”
Okusa realized that there could be a real interest in preventative health. She cites statistics that we will spend 80% of our healthcare budgets in the last six months of life and ponders why we wouldn’t want to shift those funds throughout our lives. As a result, Apothékary emphasizes helping customers find what they need—including what she calls “a robust digital roadmap” to pair with pharmaceuticals.
She didn’t start out to tie HSA and FSA funds to products in the store. Like many other parts of the business, it happened organically. The company noticed that customers—primarily women—wanted to use funds to pay. The company reports that most new customers are using HSAs and FSAs, and about 20% of their orders now use the accounts.
That makes sense to Okusa. “We put hundreds of dollars aside” in these accounts, she says, “and then we forget about it.” But what if, she wondered, that money could be spent on “things people actually want.”
Those hundreds of dollars add up. Apothékary cites statistics suggesting that approximately 80% of workers have access to HSA and FSA funds, with around 40% having funded accounts. That means, they say, that there’s $140 billion of untapped tax-free cash that consumers can access for healthcare.
That includes, the company has found, purchases that might be qualified expenses for purposes of HSAs and FSAs. The same rules apply here as they would at CVS, which means they are no less confusing. To help, Apothékary has partnered with TrueMed, a payment platform to assist with determining eligibility for expenses at check-out. Additionally, a new set of FAQs for the Apothékary website is on the way, with the hope that the company can continue to promote products and signal savings to customers. They already offer phone consultations for those who might puzzle over alternative medicines.
Okusa sees real potential in educating customers about potential tax savings, even as she mulls ways to expand. “If we can make customers happy,” she says, “We’re open to new ideas.”
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