With Americans today spending twice as much on health care as they did in the 1980s, the time has never been better to look into ways to save money. Women especially have a stake in cutting costs. They incur various gender-specific expenses, such as feminine hygiene products, birth control, and pregnancy-related services. They also tend to be more vigilant than men about going to the doctor for preventative care and medical advice. Women have a longer life expectancy, so it's easy to see why they want to stretch every health care dollar.
Thwarting efforts, however, is a lack of understanding of how various cost-cutting measures work. Take, for instance, Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). Because of their similar acronyms, individuals often confuse them. They are not the same, and knowing what each one entails contributes to proper usage and maximum benefit.
Here's a closer look:
Flexible Spending Accounts: The Basics
An FSA lets a worker elect her employer to take money directly out of each paycheck to put in a special account to pay for various out-of-pocket medical expenses. Unlike regular wages earned, this set-aside money is not taxed. Thus, the account holder saves money.
Savings vary by how much a worker puts in the fund and the percentage she would have paid on that money in federal taxes. For example, TurboTax reports that someone who earns $50,000 per year, contributes $2,000 to an FSA, and has a tax rate of 30% would yield a benefit of $600.
Employers operate FSA arrangements under federal guidelines. The IRS sets the maximum amount an individual can contribute to the account within a plan year ($2,750 in 2020), but an employer can opt for a lower figure. All funds are available to the employee on day one of the plan year. A plan year may or may not be the same as a calendar year, depending on how the employer defines the period.
The fund reimburses qualified medical expenses incurred by the employee, her spouse, and her dependents. Many plans issue debit or similar stored-value cards participants use when purchasing or paying for a service. Receiving a check after turning in a submission form along with a receipt or other proper documentation is another payment route.
The federal government determines qualified medical expenses. Company HR departments typically help employees understand the most common eligible items and services, but FSA participants may want to examine the complete list found in IRS Publication 502. Note that the Coronavirus Aid, Relief, and Economic Security (CARES) Act recently expanded the scope of FSA-eligible items.
Women considering an FSA might be particularly interested in knowing that the following expenses are eligible for out-of-pocket reimbursement:
- Medical/dental copays and deductibles (but not insurance premiums)
- Prescription drugs, including birth control pills
- Over-the-counter medications
- Breast pumps and supplies
- Breast reconstruction surgery
- Chiropractor services
- Eyeglasses, contact lenses and supplies, and eye exams
- Pregnancy and family planning products
- Feminine hygiene products
- Legal abortion
- Acne treatments
Knowing what you can use FSA funds on is vital in determining how much money you tell your employer to keep aside. While one might be tempted to pick the maximum amount allowed, this action may not be wise.
FSAs operate on a "use it or lose it" basis. Account-holders forfeit leftover money to the employer at the end of the plan's year. Because of the pandemic, the IRS has expanded grace period or carryover options employers may choose to offer, so learn the specifics of your particular plan.
Health Savings Account: The Basics
Like an FSA, an HSA helps women save by setting aside money on a pre-tax basis to pay for qualified medical expenses such as those covered by an FSA. However, a significant difference is that the account owner — not her employer — controls an HSA. Contributions roll over from year to year and remain yours even if you change jobs or leave the workforce.
Only people enrolled in a High Deductible Health Plan (HDHP) can contribute to an HSA. Those who belong to an HMO or PPO or are on Medicare cannot put money in an HSA.
Some individuals find HDHPs attractive because of their low monthly premiums. This type of plan, however, does have a higher deductible. This means you'll pay for more of your health expenses before the insurance kicks in. People can use money from their HSA toward these uncovered costs.
An employer may offer an HDHP among its insurance options and may even contribute to the HSA that often accompanies it. The Health Marketplace also contains some HDHP plans with HSAs. Banks and insurance companies are among the most common places at which to set up an HSA.
Each year, the government defines what is considered an HDHP. As noted by Healthcare.gov, HDHP qualifications for the calendar year 2021 are:
- Minimum deductible (the amount you pay for health care items and services before your plan starts to pay): $1,400 for an individual, $2,800 for a family
- Maximum out-of-pocket costs (the most you'd have to pay if you need more health care items and services): $7,000 for an individual, $14,000 for a family
(Note that minimum deductibles on many plans are often much higher than the IRS-given minimum figures. They can even be as high as the maximum out-of-pocket costs.)
The government also limits how much people can contribute to an HSA each year. For 2021, maximum deposits to an HSA stood at $3,600 for self-only HDPD coverage and $7,200 for family HDPD coverage. People age 55 and over can add an additional $1,000. Any employer contributions count toward the limit.
Putting aside pre-tax dollars in an account for out-of-pocket medical expenses can prove more than just a current money-saving action. Some people make HSA accounts part of their retirement plan.
As mentioned before, the money in an HSA is not subject to forfeiture like an FSA. The account holder can use the funds at any time — now or later — for qualified medical expenses. Thus, someone can sock money into this account tax-free to use during her golden years, usually a time with more substantial medical expenses. Note, too, that people past the age of 65 can use their HSA money on anything, but it will be taxed as income at their then-current tax rate if not spent on qualified medical expenses.
While this article offers general information, readers should consult their HR department, accountant, or financial advisor regarding specifics related to their situation. People also may want to read IRS Publication 969 for additional information on FSAs and HSAs.