Monday I wrote about picking a health insurance plan. I compared the cost of the premiums and the costs for the care I expect us to use.
Today, I am going to cover the FSA (Flexible Spending Account) and HSA (Health Savings Account), which are tax free accounts that can help lower the cost of health care when you have to pay for it.
To repeat myself from Monday: Please, please, please, remember that your medical and financial situation is different from mine, and your medical insurance options are different from mine, and in no way should you construe the following as advice on what plan YOU should pick. This is for illustrative value only.
Although they sound similar, the FSA and HSA work very differently and you don’t want to mistakenly treat one like the other.
The FSA is funded entirely by me (or you) out of pretax dollars, and can be used to pay for “qualifying medical expenses.” This means that if I have $1700 of medical expenses in a year, as projected below, I can put that money aside pretax, and get a “discount” at my marginal tax rate. Looking at the new tax rates for 2018, that marginal tax rate is likely 24%. Since every extra dollar I earn will be taxed 24% by the IRS, reducing my taxable income will “save” me 24% (unless I happen to reduce my taxable income enough to hit a lower tax bracket). In other words, I get to have $1700 worth of copays and deductibles paid for, but only be out of pocket $1292.
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There are some other nifty angles to the FSA. You can use your FSA funds to pay for medical costs not usually covered by your insurance, such as weight loss programs (or drugs), plastic surgery (ed: FSA funds can only be used for medically necessary procedures, though certain elective surgeries may not be covered well and may be a good use of your FSA funds), glasses, or braces. At my job, they are funded immediately at the beginning of the year. So if I elect to put aside $1700 in a calendar year, I can use that $1700 all at once, even in January, instead of waiting to build up the account throughout the year.
You can also use a different type of FSA for other costs: you use a pay for dependent care (i.e.: daycare, and other forms of childcare) from these pretax accounts, a huge boon if you are paying these bills anyway.
Of course, there are also drawbacks. The biggest drawback is that the FSA is a “use it or lose it” account. If I elect to put aside $1700 for the year, but only run up $300 in medical costs, I lose the remaining $1400. Also, some plans will audit you to make sure your FSA funds are being used for qualifying costs. Given how slowly medical billing moves, by the time your FSA administrator asks for a receipt, it could be 3-4 months later; if you aren’t perfectly organized, you might be hard put to find the receipt and your FSA funds could be frozen. Don’t ask how I know that.
There is also a maximum amount you can contribute to an FSA. It was $2650 for 2018. Therefore, if you want an expensive elective surgery, you can only fund that much out of your FSA. Some funds offer a grace period, meaning that you can use your 2018 FSA on bills through March 2019, rather than having to use them all up by December 31, 2018. If you do have an FSA with a grace period, you could try to overlap your FSAs to pay for a surgery. That is, put aside the maximum for 2018 and 2019, and have your surgery in February 2019. This way you might be able to use $5300 tax free. However, this depends on your plan details, and you should double- and triple-check yours to make sure this will fly.
But what about the HSA, you ask? I hear this is The Ultimate Retirement Account (per the Mad Fientist). You can put money in tax-free, have it grow tax-free (you can invest it, so you might even make good money), and take it out tax-free years later to pay for health care costs.
That is totally true. Also, sometimes your employer will contribute money to your HSA, so you get free money!
Surely there is a catch, you say. And in truth, there are a few pesky small print details to look at.
The biggest catch is–you have to have an HSA eligible plan. These are high deductible plans, and that means that you will be paying out of pocket for most of your health care for the year, if you need anything but preventative medical care (free under the ACA).
One also has to keep receipts to prove you used your HSA money on eligible costs. And the HSA is administered by a financial company who will assess fees for managing the account. Some plans require you have a somewhat high minimum in the account before they will allow you to invest your money. Considering that a big part of the appeal is being able to invest your tax free money, having to keep a portion in cash does put a drag on any potential investing returns.
Below is a table showing what I estimate I would get out of having an HSA, and also a pretend healthy young couple, with little medical needs. I gave them $120 worth of medical bills for the year–maybe a cheap prescription. My employer will contribute $2000 a year into the HSA for a couple. And, the maximum contribution for 2019 is $7000. So, if my employer puts in $2000, I can put aside $5000 into the account from my pre-tax money. At a 24% marginal tax rate, I save $1200 on taxes.
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Clearly, the young healthy couple comes out ahead in this scenario; they actually make money, because the employer contribution + the tax savings on their pretax HSA contribution dwarf their medical costs.
Me, I have enough medical costs that I don’t reliably come out ahead. My Silver plan saves me a lot of money on prescriptions. Most of my savings come from the tax savings on my HSA; if I fund my FSA at $1700, the plans start getting pretty close [$2666-$406 in tax savings = $2258 paid with the Silver plan, vs. $1850 with the HSA plan]. If something unexpected happens–such as our medication prices jump, or we have a health issue–my insurance might actually come in handy. If I don’t feel comfortable putting aside the full amount possible for the HSA, I don’t get the tax savings, and the Silver plan/FSA option pulls ahead.
Also, going to the pharmacy and getting a bill for $1000 with the HSA plan makes for an awkward discussion; the staff are usually very sweet, and feel so bad for me when they tell me the total, that I don’t feel comfortable.
I’d rather save that premium with each paycheck ($114 per month) , not to mention the huge HSA contribution ($275 per month more than the FSA), and have the option to invest the difference on my own, or choose to pay down my mortgage.
What do you think? Do you prefer the HSA eligible plan? Or do you find that you prefer better insurance coverage of your yearly bills?