Save Money on Health Care: Health Savings Account vs Flexible Spending Account

Health Savings Account vs Flexible Spending Account

In light of past 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 medical savings accounts: the Health Savings Account and the Flexible Spending Account.

I used a Flexible Spending Account for some time when I was employed and had a nice group health insurance plan. Over the past couple of years, since becoming self-employed, I’ve learned a great deal 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 (not just in retirement) 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.

Your annual contributions are limited. Check out this chart or visit my post on HSA contribution limits for more information.

Tax Year
Individual
Family
Catch-Up
2014
$3,300
$6,550
$1000
2013
$3,250
$6,450
$1000
2012
$3,100
$6,250
$1000
2011
$3,050
$6,150
$1000
2010
$3,050
$6,150
$1000
2009
$3,000
$5,950
$1000

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: FSA vs HSA

Like I said above, we used to use an FSA, which we heavily funded each year for things like baby medical costs and prescription drugs. But we no longer qualify for an FSA because I’m now self-employed, Mrs PT is a stay at home Mom, and we can’t get on a low-deductible group health insurance plan. So now we have an HSA through a local credit union.

Do you use these accounts? How have they worked out for you?



Last Edited: May 7, 2013 @ 2:28 pm The content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. 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).

  2. 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.

  3. Jackie Walters says:

    Hi PT –

    We have an HSA and the long term idea behind them are great. We’ve never met our deductible which is a good thing but what money we have in the HSA account tends to get used up before we have a chance to actually save anything in it.

    Jackie.

  4. Might want to double check me on this, but I think I read where OTC meds. will no longer qualify beginning 2012. At least for HSA.

  5. Jenna, Adaptu Community Manager says:

    I didn’t use one last year, but I’m thinking about signing up for one this year. Know of any good calculators to do an estimate of how much one should be saving?

  6. We have used the FSA for years. It provides great tax savings and is available at any time….and we have never lost any money at the end of the year because we put in our prescription drug costs, deductibles and co-pays only.

    We are not able to use the FSA for OTC items. I think this was a change to the law? Not sure.

  7. Joe Durika says:

    Love our HSA and our DCSA (dependent care spending account). The money is taken out pre-tax, so we have a $9,000 deduction right off the bat. Now if they would increase the DCSA limit to meet inflation, that would be awesome.

  8. Kim Russell Prato says:

    Yes, I love using mine. I just started using them about 2 years ago and wish that I had started using them a lot earlier. The one for RP’s daycare expenses comes in so handy and the reimbursement that I get back after submitting a claim is like a fun payday for me! My employer has also started giving a “wellness credit” to employees who complete a 2-3 step physical. We get $500 that goes into our HSA!

  9. I totally forgot to include info on the DCSA. Maybe I’ll do a whole post on that one. Hey, Kim Russell Prato, that’s pretty sweet about the $500. Not chump change.

  10. Kim Russell Prato says:

    I know! Right? And they do the health screenings at work so there’s really no excuse for not getting the free money!