Flexible Spending Accounts & Health Savings Accounts 101

Account PictureAs many people are beginning their open enrollment season for benefits at their jobs, they may have questions about all of their various options. Two options that may be helpful for people to consider enrolling in are a Flexible Spending Account or a Health Savings Account.

Flexible Spending Accounts (FSAs) were created to help individuals pay for co-pays, deductibles, some drugs, and other health care costs. FSAs are similar to personal savings accounts, but the money in the account is used to pay for health care expenses. FSAs are only available with job-based health care plans. If an employer offers an FSA, then employees are able to set aside a portion of their salary to fund the FSA, and the money put into your FSA is not taxed. An employee can choose how much they want to contribute each pay period, up to a maximum of $2,550 per year in 2015. Generally have to use that money within the plan year, however, employees can now carry over up to $500 per year to use in the following year.  Alternatively, employers have the option to offer a “grace period” of up to 2½ extra months to use up all of the money in your FSA.  After the grace period or year, you lose money left over in your FSA, so it is important to not put more money in your FSA than you think you will spend within a year.

The money in an FSA can be used for many different health care costs, including co-pays, deductibles, and other health care costs. However, you cannot spend FSA funds on insurance premiums.

Some advantages of FSAs are that the account is pre-funded so you have immediate access to the funds for that calendar year, dependents can be covered under a Dependent Care FSA, and money put into the FSA is not taxed. Some disadvantages of FSAs include losing unused money remaining in your FSA account at the end of the year, having difficulty in estimating how much money to put into your FSA, and that you may be required to keep track of all of your FSA eligible expenses in order to be reimbursed from your FSA.

Health Saving Accounts (HSAs) were created in 2003, for adults who are covered by a high deductible health insurance plan. The deductible is the amount that you have to pay out of pocket before your health insurance company starts picking up their share of your health care costs. In 2015, a high deductible plan is one with a deductible more than $1,300 for self-only coverage or $2,600 for family coverage. HSAs are similar to personal savings accounts, but the money in the account is only used to pay for certain health care costs. For example, one could use their HSA to pay bills until they hit their deductible or use to pay for co-pays and some other health care expenses. The money deposited into the account is not taxed. In order to be eligible for an HSA, you must be under the age of 65 and have a high-deductible health insurance plan. You can start your own HSA through a financial institution, or your employer may offer an option for a HSA. It is important to note that in order to use HSAs, the high-deductible plan must be your only health insurance plan. However, having vision, dental, disability, or long-term care insurance does not exclude you from opening a HSA. In 2015, the maximum amount someone with individual coverage can put into an HSA is $3,350. If you have a family policy, you can save up to $6,650. Unlike a FSA, funds roll over and accumulate year to year if they are not spent.

To determine whether a HSA would be beneficial to you, consider your budget and your potential health care needs for the upcoming year. Some advantages of HSAs are that you determine the amount of money to set aside for health care costs, you control how your HSA money is spent, and you do not pay taxes on money going into your HSA. Some disadvantages to HSAs are that it is hard to predict when you will get sick, you may not seek medical care in order to save money in your HSA, and if you take money out of your HSA for non-medical expenses, you will have to pay taxes on it.

For more information on HSAs: http://www.treasury.gov/resource-center/faqs/taxes/pages/health-savings-accounts.aspx

For more information on FSAs: https://www.healthcare.gov/can-i-use-a-flexible-spending-account-fsa/