Health savings accounts and flexible spending accounts can save you money
An FSA is an option that comes with a regular employer-provided health insurance plan. Employees can contribute pretax dollars and use them for qualified medical expenses. Right now, employers set the contribution limits; beginning in 2013, the IRS will impose a cap of $2,500. For a family of four earning $80,000, that means a tax savings of about $700. An FSA is just a cash account -- its funds cannot be invested -- and it doesn't roll over from year to year. That means if you have an FSA, December is the deadline to get the family up to date on eyeglasses, dental checkups and any complementary care services.
An HSA comes with a high-deductible health insurance plan. High-deductible plans have lower monthly premiums than other plans, but plan members will pay more out of pocket for medical expenses until their coverage kicks in. That means people who join these plans can save money if they are young and healthy, but they take a greater risk compared to a standard health plan. In 2013, the deductible -- the amount plan members pay out of pocket -- ranges between $1,250 and $6,250 for individuals and between $2,500 and $12,500 for families.
Some high-deductible plans allow members to get preventative care such as annual checkups free or with a copay, but any care beyond that will come out of the member's pocket until he or she hits the maximum.
The percentage of employers offering health coverage that included a high-deductible plan among their options has tripled in the last 10 years to 31 percent, and experts think it will be up to half within another 10 years.
High deductible plans are getting more popular because they save money for employers, but, under certain circumstances, they can save you money too. The key to saving money with a high-deductible plan is to take full advantage of the health savings account that comes with it.
A health savings account, or HSA, is triply tax-advantaged. First, the money that goes into it can be deducted from your income when you pay taxes. The new maximum annual contribution for 2013 is $3,250 for an individual, or $6,450 for a family. That means if your family earns $80,000 a year and you contribute the maximum amount, you could save $1,806 come April 15. While the money is in your account, it can be invested, unlike funds in an FSA, and grow tax free. Moreover, you don't have to pay taxes when you withdraw it, as long as you use it for qualified medical expenses.
Strive to keep enough money in cash in your HSA to cover your deductible, in case of that trip to the emergency room. The money you put into the HSA over and above that can be invested in mutual funds, stocks or other financial vehicles, just like a retirement account.
When you've established your HSA or FSA with the help of your company's human resources department or a broker like Vanguard, you can begin to spend it. This is the fun part, as the money in an HSA or FSA can go toward lots of health-related expenses that most insurance doesn't cover.
Tax-deductible expenses for an HSA or FSA include:
--Eyeglasses, including prescription sunglasses
--Many complementary health services, such as acupuncture, osteopathy, chiropractic care, homeopathy and naturopathy, as long as the practitioner is medically qualified
--Psychiatry, psychotherapy, psycholanalysis and addiction counseling
--Hydrotherapy or whirlpool therapy, if prescribed by a doctor
--All kinds of medical devices
Whether you have an FSA and regular health insurance, or an HSA and a high-deductible plan, the money in these accounts is yours, so make sure you use it wisely. There is some evidence that those with high-deductible plans and HSAs tend to avoid preventative care, which is terrible for your overall health and your wallet.
(Anya Kamenetz' latest book is "DIY U: Edupunks, Edupreneurs, and the Coming Transformation of Higher Education." She welcomes your questions at firstname.lastname@example.org)