Open enrollment decisions on health plans, 401(k)s, HSAs and FSAs can influence taxes

ROCHESTER, N.Y. — Open enrollment is here, and the selections people make now can significantly affect both their finances and their health coverage.

Frank Maltais of Fidelity Investments said people should review any major life changes, such as having a baby, getting married, dealing with a health issue or seeing shifts in their budget, and then compare those changes with the benefits they actually used last year, especially health care.

The main choices during open enrollment typically include health insurance, a 401(k), a health savings account, or HSA, and a flexible spending account, or FSA. When these benefits are offered through an employer, they are generally pre-tax, meaning the money comes out of a paycheck before taxes are figured, which can lower taxable income and potentially move someone into a lower tax bracket.

An HSA is a tax-advantaged account that can be used to cover medical expenses now or later.

Maltais said employer-sponsored contributions to these accounts can reduce taxable income. He pointed to tax brackets as an example, explaining that contributing to a 401(k) can lower the amount of income subject to tax and may reduce the rate someone pays.

“A health savings account or HSA is a tax advantage account to pay for expenses either now or in the future,” Maltais said.

“And I like to think of this way. Tax free times three. Contributions are tax free going in and if you choose to invest those funds they will grow tax free and then they can come out tax free for qualified medical expenses as well,” Maltais said.

An FSA can help with health-care costs or child care, but unlike an HSA, the funds cannot be invested and must be used by the end of the year.

Whatever tax-saving option people choose, the idea is the same: they are effectively paying themselves while potentially reducing what goes to the government.