Flexible Spending Accounts vs. Traditional Health Plans

fsa

Depending on the type of insurance you have and whether it is offered through an employer, you may qualify for tax-free savings options to pay for out-of-pocket medical expenses.

Unless they have a high deductible, most traditional plans do not come with savings options.

Flexible Spending Accounts

image of fsa diagram Flexible spending accounts, also called flexible spending arrangements (FSAs), may be provided through your employer and allow you to save money for most health care costs not covered by insurance.

Since FSA funds are tax-exempt, you save not only what you put in your account, but also the amount you would have paid in taxes. Employers can contribute to FSAs, but are not required to.

Employees can deposit up to $2,500 into an FSA per year. If they are married, their spouse can match that amount through an employer. Contributions are made through payroll deductions, so it is important to consider how much to set aside before the plan year starts.

Whatever is not spent at the end of the year does not roll over to the next. Employers can offer a grace period of an additional 2.5 months. If they do not, employees can be allowed to carry over up to $500 of unused savings toward the next year.

However, employers are not required to offer either of these options. FSA eligibility ends automatically when people stop working for the employer who offered it.

Qualifying out-of-pocket healthcare costs include deductibles and co-pays. Prescription drugs, over-the-counter medications prescribed by a physician, and medical supplies such as crutches and bandages, are eligible.

Diagnostic kits, such as blood sugar tests, are also covered. Additionally, savings may be used for dental and vision services.

Health Savings Accounts

Consumers who are self-employed or enrolled in a Marketplace plan are not eligible for a flexible spending account.

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Instead, they can take advantage of a similar option called a health savings account (HSA). This is only available for plans with high deductibles. Policyholders can open an HSA if their health plan qualifies, they have no other coverage, and they are not claimed as a dependent on anyone else’s tax return.

Spouses who meet the requirements to qualify for an HSA must establish one separately; it is not possible to have a joint account.

Furthermore, employers who offer high-deductible plans may contribute to employees’ HSAs. In that regard, HSAs can be considered “medical IRAs” because, unlike most conventional plans, they remain with the individual despite job changes or leaving the workforce.

At age 65, account-holders can withdraw savings, but they are taxed as regular income.

Tax-deferred health savings earn interest, which is also tax-free. Unused funds and accrued interest roll over from year to year.

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Since the premiums on HSA-eligible plans are lower than most traditional plans, consumers can save on insurance costs and apply the savings toward medical costs.

With an HSA-qualifying plan, individuals do not pay a co-pay when seeing a health professional. Instead, they can use savings to cover medical costs not covered by insurance.

This is especially helpful when using out-of-network services. In addition to medical procedures, other eligible services, which are determined by the IRS, include vision and dental care and prescription drugs.

If you are interested in a flexible spending plan, talk to your employer to see if it is offered and if your employer contributes. Additional information about using FSA and HSA accounts is available here.

If you are considering whether a health savings account is right for you and want to learn more about this option, visit HealthEquity.

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  1. William Peale jr

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