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Tax-advantaged accounts, such as Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), enable you to set aside pre-tax money through payroll deductions for tax-free reimbursement of certain health and/or dependent care expenses. Read on to discover the unique features and advantages of each account.
Health Savings Account (HSA)
Compatible with a high deductible health plan (HDHP), an HSA can help offset rising healthcare costs. Like other health plans, with an HDHP, you have access to a broad network of doctors, prescription drug benefits and comprehensive coverage for a wide variety of medical services. Preventive care benefits, like annual check-ups, well-child visits, lab tests, prenatal care and age-appropriate routine screenings are typically provided at no cost.
An HSA is an individual savings account, owned entirely by you, even if you change jobs or retire. It allows you to save and pay for qualified medical expenses not covered by your plan—for you, your spouse and eligible dependents. This can include doctor visits, prescriptions, eyeglasses/contacts, as well as other out-of-pocket expenses such as your health plan deductible and Medicare premiums. The most important reason to consider the HSA-eligible health plan and HSA is the tax advantage. Once your HSA is open, contributions can be made by electing pre-tax payroll deductions. Any unused funds roll over year to year, and if you invest any extra savings in your account, you won’t be taxed on those earnings when used for qualifying medical expenses.
Visit the IRS website to view updated contribution limits each year.
Flexible Spending Account (FSA)
An FSA is an employer-sponsored plan that allows you to allocate pre-tax dollars to pay toward qualified healthcare expenses, such as medical care and services, dental and vision care, prescriptions and insulin. There are two types of FSAs:
The Health Care FSA covers a complete range of qualified medical, dental and vision expenses, but is only available to employees who don't have an HSA.
The Limited Purpose FSA covers dental and vision expenses only. It’s only available to employees who are enrolled in an HSA.
Before enrolling in an FSA, you’ll need to estimate your anticipated eligible medical, prescription, dental and vision expenses for the year to determine how much to contribute to your account. Your annual contribution will be deducted from your paycheck each pay period in equal installments throughout the year, until you reach the amount you’ve specified. The amount you pay into the FSA won’t count as taxable income, so you’ll have immediate tax savings.
A portion of your unused FSA balance is automatically carried over into the next plan year. The maximum carryover amount can’t exceed the IRS maximum of $610 (for 2024) and $640 (for 2025). You must enroll for coverage in 2025 to have access to carryover dollars. You can elect as little as $52 as a contribution.
FSA accounts have a contribution limit of $3,200 for 2024 and 2025, not including amounts carried over from the previous year. Please note, if you don't enroll during Annual Enrollment, you'll automatically keep your current plans, except for HSA and FSA contributions, which don't carry over and will default to $0.
Dependent Care Flexible Spending Account (DCFSA)
A DCFSA is a pre-tax benefit account that you can use to pay for qualified dependent care expenses, such as daycare, nursery school or summer day-camp for children. You can also use the DCFSA to pay for services for adult dependents who can’t care for themselves.
The 2025 contribution limit is $5,000 for employees earning less than $155,000 annually. Employees earning $155,000 or more are limited to an annual contribution of $2,850. Please note, if you’re married and filing income taxes separately from your spouse, the IRS limits you to a contribution of $2,500.
To learn more about tax-advantaged accounts offered at Northrop Grumman, watch this video.