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We’ve been looking at different ways to save money on medical expenses, including ways to save on prescription medicines. Today, Joel from HealthInsuranceProviders.com helps us compare Health Savings Accounts and Flexible Spending Accounts:
If you’ve ever deal shopped for a great health insurance plan, you have likely encountered a lot of different terminology that can make the whole shopping process seem like a chore at best and a nightmare at worst.
Today, I want to share some down and dirty information on two of the biggest health insurance terminology culprits — the Health Savings Account and the Flexible Spending Account — so that you can begin your next health insurance shopping expedition with the knowledge you need to make an informed decision between these two types of money-saving health insurance options.
Definitions
First things first, let’s define what each of these terms mean in the most basic sense, and then we’ll dive into the details:
Health Savings Account (HSA) – The HSA is not health insurance but rather a savings account that is used for medical expenses, has some great tax benefits, and is designed to be coupled with a High Deductible Health Plan (HDHP).
Flexible Spending Account (FSA) – The FSA is also not health insurance but is a savings account provided through an employer’s Cafeteria Plan that can either be used for medical expenses exclusively (called a Medical FSA and is very similar to an HSA) or for a broader range of things like dependent care expenses, FSAs have some attractive tax benefits and are typically only contributed to via payroll deduction.
Practical Comparison
All money contributed to a Health Savings Account is 100% deductible (up to certain IRS annual limits) as an above the line deduction on the front of the 1040 personal income tax return. There are no Adjusted Gross Income (AGI) phaseouts for HSA contribution deduction so the more money then the higher a tax bracket you are in and the more attractive the deduction becomes. HSA contributions can be made up the due date of the tax return so even if you have not maxed out your contributions for the prior tax year (2009) then you still may be able to make contributions to your HSA up until 4/15/10. All money in the HSA rolls over from year to year and grows tax free and comes out tax free as long as the money is used to pay for qualified medical expenses or the account holder reaches age 65.
All money contributed to a Flexible Spending Account comes right out of your paycheck and goes directly into the FSA without you having to pay any payroll taxes on that money. The two main types of FSA’s are Medical FSA’s and Dependent Care FSA’s. Tax treatment for each type of FSA is essentially the same although one very important distinction to make between each of the two different types of FSA’s and the HSA is that all of the funds in an HSA roll over from year to year while all funds contributed to an FSA do not. You must “use it or lose it” when it comes to contributions into a Flexible Spending Account so this means that it can be very important to properly gauge just how much money you want to deduct from your paycheck to go into your FSA.
Pros & Cons
HSA Pros
- Above the line tax deduction with no income phaseout.
- Tax free growth.
- Money stays in account and rolls over from year to year.
HSA Cons
- No savings on payroll tax.
- Must have a qualifying High Deductible Health Plan in order to set up HSA.
- Annual contribution limits set by the IRS.
FSA Pros
- No payroll taxes paid on all contributions.
- Two different options: Medical FSA & Dependent Care FSA.
- Part of most employer provided benefit packages.
FSA Cons
- Money contributed does not roll over from year to year.
- No Federal income tax savings.
- Plan is tied to employer not employee.
Which Should You Choose?
No one option is right for everyone so be sure to do your own research to decide if an HSA or a FSA will help you to save money on your health care costs!
Joel Ohman is a Certified Financial Planner™ and the owner of 3 different consumer comparison websites that help people save money when searching for the best credit card, shopping for affordable health insurance, or comparing different options on car insurance.
Angie
You can actually have both. We do. We have a HSA health plan. There are restrictions on how we can use the plan at the beginning of the year – can only be used for deductible and dental (and maybe pharmacy and vision too, not sure) at the beginning of the year. Later you can use it for over the counter medicines and stuff. So, we also have elected to do a small FSA each year too.
I’m not sure if it’s true for all accounts, but there is also a BIG difference in ours as to when the money is available. For the FSA the money you elect for the year is available right away (even before you contribute). So, if you elect $1000, you can start using that January 1st. Our HSA, on the other hand, cannot be used until the contribution is actually made. This left us a little “stuck” at the beginning of the first year we elected it, but now we have enough built up that put toward any deductible charges that come at the beginning of the year. Either way, be sure you investigate the details of your specific plan. It can make a big difference!
Allison
As an FYI, anyone with a chronic illness, such as Type 1 diabetes, (and probably Type 2), should not bother with a Health Savings Acct. You are not going to be able to actually save any money to keep in a HSA; you would be spending it all on medical appts, drugs, etc. Plus, if you have a choice of a plan with a lower deductible, you should take that instead.
Put more money into the FSA instead.
Also, keep track of your doctor and lab appointments, as the mileage is covered under the FSA at a predetermined rate (not sure what it is at the moment) that you can be reiumbursed for.
Chriscia C
We decided to try a FSA plan this year. So far, so good. And it is reassuring that if for some reason we dont use all of it by the end of the year, I can submit couponing reciepts and get my money back through things like that.
Noelle
You do get federal (and state) income tax savings on FSA money. Your employer funds the FSA with pre-tax dollars – no FICA, federal income tax or state income tax applies to money you deposit into your FSA. Also, if your employer has a high-deductible plan that qualifies for an HSA and your employer gives you the option of funding your HSA with pre-tax dollars, then you would not owe FICA on the pre-tax amounts you deposited into your HSA (but if you establish your HSA own your on and fund with post-tax dollars, then, as noted above, it is only an above-the-line deduction without the FICA savings).
Noelle
In response to the idea that having a chronic illness makes an HSA a bad idea, I would say, it depends. The question is not so much is an HSA or an FSA better for my family; instead, the question is a traditional health insurance plan (high premiums, low deductible, prescription and doctor visit copays) better for me than a high-deductible health insurance plan. You can only use an HSA if you have a qualified high-deductible plan.
When you have a chronic illness and a high-deductible plan, you will have high costs at the beginning of your year as you satisfy your deductible and your max out of pocket costs. But with a high deductible plan (or, most of them), your total OOP costs are capped at premiums PLUS max OOP specified by your plan (which amount includes your deductible). With a traditional plan, your costs are not capped because co-pays do not count toward either your deductible or your max out of pocket, making it much harder to calculate your maximum exposure. So if you have a chronic illness that nickel and dimes you with doctor visit and prescription co-pays, a high deductible plan might make sense if you can swing the upfront costs of meeting your deductible.
kelli
We have an HSA and love it through my husband’s job. Our max out of pocket is 7K. I have a tax question. I had surger this year, therefore we maxed out and paid for all of this 7K out of our HSA. We can also itemize on our federal taxes and can deduct part of our medical expenses, because they were more than 7% of our income. We funded his HSA with pretax dollars, can we claim the deduction as well? If so for how much? We only funded our account in 2009 with the 5590 ( I think) for the max of family, and paid for the rest using money from year 2008.
Jennifer
This is what we are doing: I am self-employed, and hubby has ins offered through employer, but it is not affordable. I am taking what we were paying for premiums and just putting it into our own (HSA) . We control everything!We have no other insurance, if something casastophic happened we would be in trouble, and would have to claim bankrupcy (we are curently debt-free). Bankrupcy is only 7 years, hopefully Obama has a better plan for us!
JD
Keep in mind if you choose an HSA and are afraid you’ll be “stuck” with paying for some medical expenses before it is fully funded, you are allowed a one-time rollover of traditional IRA dollars into an HSA – max. rollover is a single year HSA max. contribution.
If you are relatively healthy and can fund an HSA every year, you will be paying yourself rather than premiums for health insurance you may use sparingly. Keep in mind as it stands now, your biggest expense in retirement is likely to be healthcare expenses, and if you have a hefty sum at retirement in your HSA, you will be in a much better position to pay those expenses at retirement. You can also use the money to pay for Long-term care insurance premiums. There are lots of advantages to an HSA.
Kristin @ Making Cents Out of Life
My FSA saved our lives many times while I was working, in terms of being able to go to the doctor when we didn’t have the money for a co-pay. I always knew I’d use 100% of whatever we put in, so allocated the maximum to it that I could. We both have a lot of health problems, otherwise I would only recommend putting in a smaller amount equal to your deductible plus a litlte more. How well each one works is different for each person I think; we couldn’t have used the HSA offered by my last employer, but I think that some of them vary from place to place other than the basic way they work. I do know I didn’t understand them as well as I do the FSA. My FSA was always used with pre-tax dollars, so if yours is like that I def. recommend using it because you could go to the dentist or optometrist at the end of the year if you think you’re going to lose your money. You can also buy medical supplies and OTC meds/supplies. I could go on and on about the benefits of an FSA…but I’ll stop now :)
I didn’t get one the first year I worked because I didn’t read up on them and learn how they worked, and i wasted a lot of money. Someone needs to write a “For Dummies” book on the subject! I’m a dummie that would buy it!
Kari
I just started a new job and have been considering starting a FSA. The company that my non-profit uses, just requires that you fax in your receipts (and then the money is direct deposited back into my checking account). I’m strongly leaning towards putting some money in, but my only concern is coupons/RR’s/ECBs. I rarely pay for any over the counter meds in full (out of pocket). Typically what I buy I use coupons with and then “pay” using ECBs at CVS. In my mind ECBs are no different then gift cards, but I don’t want to do anything illegal.
For example if I bought a bottle of nyquil regular price $5.00 and used a $1.50 coupon and then paid with a $3.00 ECB for an out of pocket of $.50 plus tax, would I circle the $5.00 or the $5.00 and the $1.50 and make a note that I only paid $3.50? Or would I need to circle my actual out of pocket of $.50? I was thinking I’d submit for $3.50 since that’s what I actually “paid”. Sorry if that is confusing, I just want to make sure I understand how other folks report their coupon deals to the feds so I don’t get in trouble. Thanks in advance for any advice.
Noelle
Kelli,
You can only claim the “above the line” deduction for money you put into your HSA if you funded the HSA with taxed dollars. So if your husband’s employer funded the HSA with pre-tax dollars at your instruction, you cannot also claim the above-the-line deduction (the exception would be if you have a family high deductible plan, where you could contribute $5950 in 2009; if your husband’s employer only withheld $3000 per your instruction, you could claim the above the line deduction for up to $2950 if you contributed the full amount). Also, I am fairly confident you can only deduct your medical expenses that exceed the % income threshold to the extent you paid for the medical expenses with taxed dollars. That is, if you paid for your medical expenses with your HSA dollars (or FSA dollars), you cannot itemize those expenses (or you run the risk of losing in an audit scenario).
Noelle
Kari,
I don’t know if there is clear guidance on that issue. Some drugstores will put at the bottom of your receipt “$___ in FSA eligible expenses,” while other drugstores will just * FSA eligible expenses. If there is a $ amount specified as eligible, that is the amount I submit; if there isn’t a $ amount, I submit the lesser of (a)total cash spent and (b) retail price plus tax of FSA items. I’ve never had an issue with either approach from my FSA administrator, and I submit a lot of OTC receipts.
The Health Dude
While health is wealth most of our people no good health and it is the reality that they have no wealth to keep health well. To keep good health we also need wealth. Health is wealth? Not always that!
Rachel Schulte
Let me throw a different idea out to everyone. My husband recently went into private practice as a marriage and family therapist and insurance policies were totally unafforadable! We had some friends using a ministry called Samaritan Ministries. It is basically an organization that is Christians helping other Christians with health insurance costs. It even covers maternity!!! I recently had to have several medical tests done, including an MRI and I will tell you that my total bill was over $4,000 (after discounts given b/c I was self pay) and we only payed our $300 as the policy is for medical needs submitted. If we had had insurance, even paying 20% would have been over $800!!! It is a GREAT ministry. Check out their website….and if you’re interested, please contact me. Would love to share about them.
Julie
From my experience a health savings account wasn’t such a great deal. Since I am self-employed and have to pay both the premium and the deductible, the savings hasn’t been that great (as opposed to someone who gets the premium paid by their employer and only has to pay the deductible). I found it isn’t very good for women who plan to become pregnant (at least on my BCBS plan). You have to buy a maternity rider but it is pretty worthless because you have to hit the deductible before they pay a cent. When your pregnancy runs across two calendar years then they likely won’t have to pay anything because you won’t hit the deductible limit either year.
From my experience, I wouldn’t sign up for one again if I had to pay the premium and make the HSA contributions.
Maria
This is a great article. I wasn’t aware of the differences between FSA and HSA and this is very helpful. Thanks for the great post!
sammilo
While health is wealth most of our people no good health and it is the reality that they have no wealth to keep health well. To keep good health we also need wealth. Health is wealth? Not always that!
זר מתוק
Keep in mind if you choose an HSA and are afraid you’ll be “stuck” with paying for some medical expenses before it is fully funded, you are allowed a one-time rollover of traditional IRA dollars into an HSA – max. rollover is a single year HSA max. contribution.
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