In light of recent Health Care discussions on my blog and the fact that it’s soon to be benefit re-enrollment period at your work, I thought I’d address a couple of tax-advantaged health care accounts: the Health Savings Account and the Flexible Spending Account.
I’ve used an Flexible Spending Account for some time and I’m just learning about Health Savings Accounts. Let’s look at what they are and how they can help you.
Health Savings Account (HSA)
The Health Savings Account is like an IRA. You get to fund it with pre-tax dollars and it’s typically administered by a financial institution. But unlike an IRA, you get to use the funds when you need them towards qualifying medical costs.
You also get to decide where the funds are invested. You get a lot of control with this account. Tax savings and growth.
Only certain people qualify. You must be enrolled in an HSA-eligible high-deductible health insurance plan.
You’re annual contributions are limited. 2010 limits are $3,050 for individuals and $6,150 for families.
Flexible Spending Account (FSA)
The Flexible Spending Account is a pre-tax dollars savings account your company administers where you’re allowed to save up a year’s worth of health care costs. Most people use it to pay for deductibles, co-pays, and household health care items. It works like this:
At the beginning of the year (or during your benefit open enrollment) you must elect to open the account and save a specific dollar amount.
This account is funded automatically from your earnings at work. Your company will deduct the funds before taxes are calculated (pre-tax).
Throughout the year you’re allowed to spend the dollars you’ve accumulated in the account. The spending must be for qualifying health care costs.
Important: it’s a use-it-or-lose-it type plan. You must spend all the funds in the account or you lose them. Thus, people are normally very conservative with the amount they elect to fund the account.
The effect of using the account is big tax savings. If you normally spend $1,000 on “above coverage” health care costs in a year, you could save around $250 a year by using one of these accounts.
Things you might not have known were qualifying health care expenses (every plan is different, but these oddities are likely qualifying): Hand sanitizer, cold remedies (and other over the counter meds), sunscreen (like Coppertone®), and band aids.
What We Use
We currently use an FSA, which we heavily funded this year for baby medical costs. But we do not qualify for the HSA because we’re lucky to be on a low-deductible premium plan.
Do you use these accounts? How have they worked out for you?
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I have had an HSA with United Healthcare for 3 years now and I have and still am a huge fan of my HSA. I love the fact that the money in the account rolls over and that I can get an above the line tax deduction for everything I contribute into the account (up to the IRS limit).
Thanks for educating the general public about the health savings accounts and the flexible health savings account and how they differ and how they work. I was not even aware that these types of savings accounts were available. Now I do. It’s interesting way to save money for health related reasons.