How FSAs and HSAs Ease the Pain of Healthcare Costs
The fall open enrollment season isn’t just about choosing the best health insurance plan for the coming year. It’s also the time when you may have the option of enrolling in a flexible-spending account (FSA) or health savings account (HSA).
Both allow you to set aside tax-free dollars to cover out-of-pocket costs. They provide valuable tax savings that can soften the blow of healthcare spending.
FSAs are offered only through employer-based insurance. About three-quarters of large employers offer FSAs but just 17 percent of companies with fewer than 200 workers do, according to the Kaiser Family Foundation.
You may also have the option of an HSA if you have a high-deductible health plan (HDHP), whether through your employer or an Affordable Care Act (ACA) health plan. One-quarter of employers offer an HSA with an HDHP, and among large employers with more than 200 workers, 51 percent offer HSAs, according to the Kaiser Family Foundation's 2016 Employee Benefits Survey. But if you have an HDHP through your employer, you can’t have both an FSA and an HSA. That’s a lot of acronyms!
Here’s how to decode the jargon to understand how these tax-advantaged plans can save you money on healthcare costs.
Flexible-Spending Accounts
Who’s eligible: Participants in employer-provided insurance plans that offer this feature.
What it covers: A wide range of medical expenses (PDF), including co-payments and deductibles (though not premiums), prescription drugs, and medical equipment.
Maximum contribution: $2,550 per year pretax from your pay.
Benefits: If you contribute the max and are in the 33 percent tax bracket, you avoid about $840 per year in taxes. You can estimate you savings with this calculator offered by WageWorks. The downside is that if you don’t use the money on healthcare costs within the plan year, you lose it. (There may be a grace period.) Most FSAs come with a debit card that you can use to pay for expenses. Go to fsastore.com to purchase FSA-eligible items including sunscreen, condoms, and reading eyeglasses.
Health Savings Accounts
Who’s eligible: Participants in a high-deductible health plan, which must have a deductible of at least $1,300 (PDF) for an individual and $2,600 for a family.
What’s covered: Medical expenses including deductibles, co-payments, and bills not covered by insurance, such as dental care. Check IRS Publication 502.
Maximum contribution: $3,350 per year pretax for singles and $6,750 for a family. If you’re over 55, you can put in an extra $1,000 per year. About half of employers make a contribution to the account, too.
Benefits: Unlike an FSA, an HSA is portable and can be invested—like a 401(k) for medical expenses. You can retain the account even if you switch jobs or insurance plans. Earnings aren’t taxed, and if you use the money for qualified healthcare costs, you pay no tax when you spend it. But if you spend the money on nonmedical expenses before age 65, you’ll pay taxes plus a possible 20 percent penalty.
Editor's Note: This article also appeared in the November 2016 issue of Consumer Reports magazine.
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