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TCP CPA Practice Questions: FSAs and HSAs
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May 20, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching about FSAs (Flexible Spending Accounts) and HSAs (Qualified Health Savings Accounts). Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-tax-savings-using-fsas-and-hsas/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:47 Question 1: How FSAs Affect Gross Income 02:54 Question 2: Using an HSA Compared to No HSA 05:37 Question 3: When HSAs Withdrawals Incur a Penalty 06:53 Question 4: Traits of an FSA 08:29 Question 5: The Potential Consequences of Not Fully Contributing to an HSA 10:30 Pillar Topics
View Video Transcript
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Welcome to another TCP walk-through video. I'm Logan, and in today's video, we're going to be going over FSAs and HSAs
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and we're going to be doing it the Super Fast CPA way, which is diving straight into questions to learn the material
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If you don't know much about our strategies, make sure you go check out our free one-hour webinar training on superfastcpa.com
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We go over the key ingredients to passing the CPA exam. It's something you don't want to miss. Again, it's free, it's one hour long, and it will save you so much time struggling with your process
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The link will be in the description. Also, just letting you know, in this video, we'll only be going over five questions
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but Superfast CPA members will have access to the full 10 question video when we post it on the members' forum
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So if you like this, you can get more of it by becoming a super fast CPA member
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With all that said, let's dive straight into the questions. All right, here is question one
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Patricia enrolls in a dependent care flexible spending account, or FSA, in February 20x4
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She earns $3,200 per paycheck and decides to allocate $100 per paycheck to her FSA
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Calculate Patricia's gross income in each paycheck after her FSA contribution. Assume the maximum allowed contribution is $5,000 per individual
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Okay, we don't really know how this works. You know, is it just you take out the $100 from the paycheck and that's it
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So would it be $3,100? Is there something else that we don't know about
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Let's go ahead and dive straight into the answer to learn how this works. Okay, and it was that simple, $3,100
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So you just take the $100 out, and that is her gross income after the FSA contribution
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Let's learn a little bit more about what FSAs are. Flexible spending accounts, or FSAs, are employer-sponsored benefit plans that allow employees to set aside pre-tax dollars from their paychecks into an account for specific expenses, such as medical or dependent care expenses
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And by the way, there are two different kinds of FSAs, again, one specifically for just medical expenses
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and one specifically for dependent care. We're not going to dive super deep into that in this video
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but just know that those are the two different kinds of FSAs typically
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Contributions to the FSA reduce an employee's taxable income providing tax savings
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The funds must be used within the plan year for eligible expenses, although some plans offer a grace period
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or allow a carryover of a limited amount into the next year
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FSAs are use it or lose it accounts, meaning any unused funds at the end of the plan year or a grace period are forfeited
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are forfeited. So basically you take some money out of your paycheck before it's been taxed
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It's put into this specific account and you can take money out of that account throughout
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the year specifically for medical expenses and stuff like that and you're saving money
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because you're not being taxed on that money because again it was pre-taxed money. But with FSAs
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you have to use it in the year you get it. It's use it or lose it like it said
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So let's go ahead and go to the next question to learn about HSAs. Okay
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here is question two. Laura contributes $4,000 to a health savings account or HSA and uses the
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entire amount from her HSA to cover her medical expenses. Her colleague, Marco, pays $3,900 in cash
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for his medical expenses without using an HSA Given both are in a 24 marginal tax bracket calculate the difference in taxes that Marco paid on his medical expenses compared to Laura Okay again we haven really dealt with
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HSAs so far, so let's go ahead and dive straight into the answer to learn how this works
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Okay, and the answer is that Marco spent $836 more dollars when you include taxes than Laura did
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So let's go ahead and kind of figure this out. Marco pays his medical expenses from post-tax
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So again, this is money he just had in his bank account. It wasn't pre-tax or anything like that
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The additional tax he pays on the $3,900, which could have been pre-tax dollars in an HSA
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is calculated as $3,900 times 24% or $936. This makes his total $4,836, which is $836 greater than
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Laura's $4,000. Laura uses pre-tax dollars from her HSA, so she does not incur this additional tax
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cost. Therefore, Marco paid 836 more in taxes compared to Laura who used her HSA. And by the way
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the reason that that works is that he already paid taxes on this $3,900 and now he's spending
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money to pay for medical expenses. So overall, he's spending a lot more money when you include the
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taxes. Whereas Laura, she only uses the $4,000 that was pre-tax. She never pays tax on it. So she's
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just using the $4,000 and that's it. So let's read about health savings accounts a bit more
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Health savings accounts or HSAs are tax-advantaged accounts designed for individuals with high deductible health plans or HDHPs to save for medical expenses that the insurance does not cover
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Contributions to an HSA are made pre-tax, kind of like an FSA, reducing taxable income for the year
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The funds in the account can grow tax-free and withdrawals are also tax-free when used for qualified medical expenses, which includes a wide range of costs from prescriptions to surgeries
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One of the key benefits of an HSA is that the funds roll over year after year, there's no requirement to spend the money within any given year providing a way to save for future health expenses or even retirement
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Okay, so HSAs are a little bit different. FSA is specifically sponsored by the employer
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HSA is because you have a high deductible health plan and they're both pre-tax, but HSA's you don't have to use it all in the year. They're not use it or lose it like an FSA. So that seems a little bit better, honestly. So we learned a lot about HSA
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In that question, so let's go ahead and go to the next question. All right, here is question three
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Evaluate the following scenarios and determine in which case a person would incur a tax penalty for withdrawing funds from their health savings account
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assume all individuals are under the age of 65. Okay, we haven't really learned about the penalties for HSAs yet, but if you want, go ahead and pause the video
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I think you could probably figure out which one is the correct answer just by reading through them
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And when you're ready, come back, we'll look at the answers together. Okay. And the answer was that Olivia, who takes out $1,000 from her HSA to finance her vacation to Europe, would pay a penalty
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And that kind of makes sense because she's not using it for anything that is even remotely medically related
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HSAs are designed to provide tax advantages for saving money used for qualifying medical expenses
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Withdrawals for non expenses such as Olivia vacation are not only taxed but also subject to a 20 penalty if the account holder is under 65 years old Therefore Olivia would incur a tax penalty for using her HSA funds for non purposes
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So she's getting a 20% tax penalty or $200 tax penalty for withdrawing this for non-medical expenses
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So basically, she's only getting $800 of it. All right, we learned a little bit more about HSAs there
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Let's go ahead and go to the next question. Okay, here is question for, which of the first
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following is true about a flexible spending account. Okay, so funds roll over completely from year to year
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without any limits. That doesn't seem true based on what we've gone over. Contributions are tax
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deductible on an individual's federal income tax return. We haven't really talked about that
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I'm not sure if that's true. Withdrawals for non-medical expenses are tax-free after the holder
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reaches age 65. I haven't learned about that. Contributions are made with pre-tax dollars reducing
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taxable income. Okay, that sounds about right. It's probably D. Let's go ahead and look at the
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answer to see if we're right and learn a little bit more. Okay, and yeah, we were right
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Contributions are made with pre-tax dollars, reducing taxable income. So let's learn a little bit more
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about the other options. One key feature of a flexible spending account is that contributions are
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made with pre-tax dollars, which reduces an individual's taxable income. We know that. This results in tax savings by decreasing the amount of income subject to federal and often state
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taxes. Option A, so the funds roll over completely from year to year without any limits
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is incorrect, as most FSAs require funds to be used within the plan year
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with limited carryover options. So that one we kind of knew already too
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Option B is incorrect because FSA contributions are made through payroll deductions
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and not claimed as deductions on tax returns. So this is not a tax deduction
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So that's something important to remember. Option C is incorrect as FSAs do not allow tax-free withdrawals
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for non-medical expenses at any age. So that might be something that HSAs can do where we haven't really looked at that yet
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But for FSAs, you cannot ever withdraw it for any reason other than for
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medical reasons. Okay, we learned a little bit more about FSAs there, so let's go to the next
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question. All right, here is question five. James has an annual income of $50,000 and is in a 20% tax
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bracket. In 20x4, he contributes $2,000 to his HSA, even though the maximum allowable contribution
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is $3,600. Later in the year, James incurs $3,000 in medical expenses, calculate how much
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additional tax James paid by not maximizing his HSA contribution if he had, if he had to pay
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$1,000 of his medical expenses out of pocket due to insufficient HSA funds. Okay, so because he didn't
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maximize his HSA contributions, he's probably going to pay additional taxes. So go ahead
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pause the video, you probably can figure this out, think through it, and when you're ready
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come back, we'll look at the answer together. And the answer is $200. So let's read through this
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James could have contributed an additional $1,600 to his HSA, and that's his max less what he actually contributed
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By the way, the $3,600 that we mentioned in this, that's not necessarily the actual contribution limit for the current year or for any current years
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That's not really what the point of this video is. We're more just trying to teach you how it works, not necessarily trying to teach you the exact numbers because, frankly, they change every year
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This additional contribution would have reduced his taxable income By not contributing this amount James missed out out on the tax savings The full additional tax savings he could have had would have been the times the 20
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equaling $320. However, since he only needed $1,000 more dollars to cover his medical expenses entirely from his
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HSA, the foregone tax savings on this amount is actually the $1,000 times 20%, equaling $200
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James paid $200 more in taxes than if he had maximized his contribution to cover his expenses
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So because he didn't put as much money in his HSA as he should have, he had to pay some out of pocket
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and that not only cost him money out of pocket, but also extra taxes because that was post-tax dollars instead of pre-tax dollars
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Okay, we've done five questions so far. Before we go any further, let's do one more part of the process called Pillar Topics
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Now, the idea behind Pillar Topics is that as you're going through the questions to learn the material
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you will notice topics and concepts that keep popping up. These are things that show up in three, four, five questions or more, and obviously it's something super important that you need to know for your exam
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So let's go ahead and look at the pillar topics for this video. Okay, here are the pillar topics
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Basically, again, just the important things about HSAs and FSAs and what you need to know
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HSAs are available only to individuals with high deductible health plans or HDHPs
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Contributions to HSAs are made with pre-tax dollars, reducing taxable income. Funds in HSAs roll over year to year
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There is no requirement to spend down the balance at the end of the year
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Funds accumulate over time if not spent. Withdrawals from HSAs for qualified medical expenses are tax-free
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If the money is used to pay for qualified medical expenses, there are no taxes on the withdrawal
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And after age 65, funds can be withdrawn for any purpose without penalty, but will be taxed if not used for qualified medical expenses
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Okay, we didn't really learn that little part right there in the questions, so I figured I would throw it in the pill
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topics. Those are the pillar topics about HSAs. Now let's look at the pillar topics for FSAs
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FSAs are employer-established benefit plans, so you don't get them for the same reason
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They are available only through employers who offer these plans as part of benefits packages
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Contributions to FSAs are also made with pre-tax dollars, leading to tax savings
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Similar to HSAs, this reduces taxable income. Funds in FSAs must be used within the plan year
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with limited carryover options. Known as the use-it-or-lose-it rule, funds generally must be used
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the end of the plan year, although some plans allow a small carryover into the next year
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or grace period of up to 2.5 months. Probably won't have to deal with that in the CPA exam, by the way
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Withdrawals from FSAs are only tax-free if used for qualified medical expenses
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All right, those were the pillar topics, and that is the end of this video. Before you go, just one more reminder to go check out our free one-hour webinar training on
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superfast cpa.com. We go to the key ingredients to passing the CPA exam
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Again, it's one hour, it's free. It will save you so much time struggling with you. your process, make sure you go check that out. Also, if you liked going through these five questions
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in this format, just remember that Super Fast CPA members will have access to the full 10 question
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video when we post it on the members forum. So you can get more of this if you become a Super Fast
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CPA member. If you liked this video, make sure to like it and leave a comment. Thank you for watching
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I hope this was helpful, and I will see you in the next video
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