With health care costs skyrocketing, it’s natural that consumers are looking for ways to trim expenses. A comprehensive health insurance policy is a great place to start, but insurance only covers so much. Co-pays, prescriptions, appointments with specialists and medical equipment can be expensive, and insurance coverage rarely is enough to cover the cost.
That is why flexible spending accounts and health savings accounts are such great ideas. Many employers offer one or both of these options as an employee benefit, and they can make a significant improvement in the consumer’s ability to afford quality health care. By examining both of these accounts and the advantages provided by each, anyone can be prepared to make a smart financial decision.
What Is a Flexible Spending Account?
A flexible spending account, or FSA, allows employees to withhold some of their paychecks before taxes. The withheld amount is deposited into an FSA, and these funds can be used for qualifying medical expenses.
When people wonder what an FSA is, they want to know how it can benefit them. With an FSA, workers can reduce their income tax liability by reducing the amount of money they receive with each paycheck. FSA dollars are taken before taxes, so many people find that they owe less in federal income tax because of these accounts.
Moreover, those who have an FSA appreciate that they can use the money to pay for co-pays, prescriptions, medical equipment, lab tests and a host of other medical-related expenses. When an emergency arises, and expensive care is required like home health care services or a personal care assistant, an FSA can be an enormous help.
However, there are limits placed on FSAs. It’s only possible to contribute approximately $2,600 to the account each year. Employers decide whether or not some portion of that amount, up to $500, is eligible to be rolled over to the next year. This is generally referenced as a grace period, or claim run out. At Meritage Medical Network, we have a 2 ½ month grace period after the end of each plan year, in which an employee may incur expenses until March 15th that can be applied toward the remaining balance in that employee’s prior year account. Anything that the employee does not use before the final filing date of the rollover period goes back to the employer. Accordingly, proper planning ahead is vital.
Employees who want to participate in the FSA must decide at the beginning of the plan year what their contribution will be. That amount is divided up by the number of pay periods in the year, and an equal amount is withheld from each paycheck. Employees cannot decide to adjust how much is being set aside unless they undergo a qualifying life event.
Often, employees who have an FSA are issued a debit card that they can use to pay for qualifying medical expenses. They have access to the full amount that they are setting aside, even if that amount hasn’t been deducted from their paychecks yet. Essentially, the employer owns the account. If the employee leaves their employment for any reason, they forfeit the funds in their FSA.
What Is a Health Savings Account?
With a health savings account, pre-tax dollars are again set aside to be used for qualified medical expenses. While employers may offer these as an employee benefit, an HSA also can be established by an individual.
Employees who have the opportunity to contribute to an HSA must have a high deductible health plan or HDHP. This means that their deductible must be at least $1,300 for an individual or $2,600 for a family. An individual may contribute approximately $3,400 a year if their insurance covers only themselves. A family plan has a contribution limit of $6,750. People 55 and older may contribute an extra $1,000 to the plan.
People who are wondering about HSA accounts may like to know that they own the account. Accordingly, if they leave their employment, they still may have access to that account. This is because they have access only to what they have actually contributed. Additionally, any money that is in the HSA rolls over to the new plan year without limits. This makes HSAs an especially attractive option to people who want to establish considerable savings to pay for future medical expenses.
HSA vs. FSA
The difference between HSA and FSA is significant enough to bear taking a closer look. Flexible spending accounts are only offered by employers. In other words, it is not possible for an individual to set up one of these accounts. However, a health savings account may be established either by an employer or an individual.
HSAs generally allow people to contribute more to the plan each year. What’s more, any money not used in the current plan year will fully roll over to the next. That’s not true with FSA, in which it’s possible to roll over only a certain amount that is $500 or less. The rolled-over amount generally must be used by March 1, or it is lost.
With an FSA, consumers have immediate access to all funds that they have pledged to contribute for the year. If they have a medical emergency in January that requires all of the funds, they can use them. An HSA is different in that the consumer only has access to the amount of money that is actually in the account at the time of the expense.
Advantages of FSA and HSA Plans
When it comes to looking at FSA vs. HSA, both accounts offer significant benefits. Both reduce the amount of taxable income that the contributor takes home. This means paying less in federal taxes every year. That becomes an advantage for employers too, as their tax liability also decreases.
The other obvious advantage is the ability to cover the cost of medical expenses whenever they pop up. Tremendous peace of mind can be found from knowing that it’s possible to pay for ambulance transportation and X-rays without disturbing the day-to-day budget.
Which Plan Is Right for You?
Looking at FSA vs. HSA suggests that either plan is a great idea. Self-employed individuals may gravitate toward HSAs because FSAs are not available to them. However, if an employer offers an FSA, then it is wise to opt-in to allow someone else to manage the administration of the account. Either way, these accounts make excellent financial sense or you can select both an FSA and HSA-D Limited FSA in some companies.