Save Money on Health Care: 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.

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?