Leveraging your Flexible Spending Account or Health Savings Account

Doctor With Piggy Bank

Do you have a Flexible Spending Account or  Health Savings Account? you know how to maximize its potential?  Do you know the difference between the two?  Are you taking advantage of them?

In my experience talking with my co-workers during open enrollment season, most don’t understand the difference between a Flexible Spending Account (FSA) or a Health Savings Account (HSA), nor do they understand the benefits from electing to have one. Granted, my Human Relations department, does a great job providing opportunities to learn about FSAs and HSAs most of my co-workers can’t break free from a client site to take the time to attend an education session on the health care options during open enrollment.   Even my husband didn’t take advantage of his FSA prior to us getting married and me adding him to my insurance plan.

So lets take a look at both an FSA and HSA and how you can benefit from using one.

What’s a FSA? A FSA is an account where you can put up to $2,500 before taxes on an annual basis and use the money toward medical expenses.   Usually, the account opens on the 1st of January, and you have until 31 December of the same year to use the $2,500.   Most employers offer an FSA as an option for employees, who chose insurance plans such as Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), or Point of Service (POS) Plan.

What medical costs can you use an FSA to cover?  You can use your FSA to cover your prescription medications, insulin, medical equipment, eyeglasses, dental exams and lab work.  IRS Publication 502 Medical and Dental Expenses, provides a detailed list of all medical expenses that are eligible and ineligible under a FSA.   Some examples of things that are ineligible are: cosmetic surgery, hair transplant, future medical expenses, nutritional supplements, insurance premiums and co-pays. The IRS annually updates Publication 502 Medical and Dental Expenses.

Now, lets take a look at a HSA. A HSA is an account where you can put up to $6,450 for 2013 before taxes use the money toward medical expenses.   In order to be eligible for a HSA, you must participate in a High Deductible Health Plan.  A High Deductible Health Plan have a lower premium and higher deductibles, and can offer additional wellness services.   HSA’s are different from FSA’s because you can roll over the amount in the HSA and allow the remaining amount to accumulate from year to year and can be invested similarly to a 401K.

It should be noted, that if you have a HSA, and your deposits are not made through an employer, those deposits are post tax contributions which can be leveraged on your income tax to decrease your gross adjustable income.  Like an FSA, the IRS Publication 502 Medical and Dental Expenses, provides a detailed list of all medical expenses that are eligible and ineligible under a HSA, which the IRS updates annually.

It should be noted, that individuals who have a High Deductible Health Plan and HSA are eligible for a Limited Purpose FSA.  A Limited Purpose FSA, allows participants to contribute pre-tax deposits to an account for use for dental and vision expenses.

Now that we have an understanding of the differences between a FSA and a HSA, how do you leverage your FSA or HSA to its full potential?  If you have a FSA you want to use your contribution before the end of the year, on any approved medical expenses.  If you have a HSA, with a High Deductible Health Plan you want to be able to use the HSA to cover your deductible, as well as any approved medical expenses. If you also have a Limited Purpose FSA, as part of your High Deductible Health Plan, you need to use your contribution before the end of the year.  Additionally, with a HSA you want to save some of your contribution so you can invest it and begin to leverage compounding interest to grow your HSA every year.

One thing I recommend that everyone should do, is read IRS Publication 969 annually to see what changes the IRS has made regarding FSAs and HSAs.  It is critical as a consumer to understand how changes in the tax code impact your health insurance.

Gretchen

References:

https://www.healthcare.gov/can-i-use-a-flexible-spending-account-fsa/
http://www.irs.gov/publications/p502/index.html
http://en.wikipedia.org/wiki/Health_savings_account#cite_note-20
http://www.health401k.com/2011/09/health-savings-accounts-an-introduction/
http://en.wikipedia.org/wiki/High-deductible_health_plan#cite_note-1
http://www.payflex.com/forms/HsaLpfsaBrochure.pdf