It’s open enrollment time, and you are probably wondering what you can do to increase the efficiency of your health care dollars. There are two types of accounts that can provide you with expanded options for health care: Flexible Spending Accounts and Health Savings Accounts.
Both of these types of accounts offer special tax advantages. You can fund both with pre-tax dollars, reducing the amount of your income that is subject to tax. Additionally, you can use either a Health Savings Account (HSA) or a Flexible Spending Account (FSA) to pay for medical expenses that may not be covered in your health insurance plan.
There are important differences between the two types of accounts, however. Be careful not to mix these up, and understand the basics of each type of account.
Flexible Spending Account
Your FSA is usually provided as part of your employer’s health care offerings. You do not need to be covered by an insurance plan in order to have a Flexible Spending Account, however. Your FSA can also be used to cover dependent care expenses, such as care for a child, or elder care expenses. The major downside to the FSA is the fact that you have to use it within a year, or you lose what is left over. This prompts many people to go on a spending spree at the end of the year, buying over the counter medications, getting non-covered procedures done, and scheduling doctor appointments and paying the co-pay with the FSA.
Health Savings Account
One of the most attractive things about the HSA is the fact that it rolls over from year to year. You do not have to use all of the money in the account each year; it can build over time. Your Health Savings Account can grow further, since it acts like an IRA in that you can invest your money in stocks, funds and bonds if you don’t feel like just letting it sit there earning a lower return as a cash investment. But you can only use those returns (which grow tax-free) on health and medical expenses.
In order to qualify for the HSA, though, you do need to have a health insurance plan. This plan must be a high deductible health insurance plan. So you will have more out-of-pocket expenses — which you can pay for with your HSA. But at least your monthly premium will be much lower, so you can save that way.
In the end, you need to do an assessment of your financial situation and your health situation, and make a decision based on what is likely to do the most good for you. Learn more about FSAs and HSAs from the Bureau of Labor Statistics and the U.S. Treasury.