Health savings and flexible spending accounts make for a nice crossover between money and medicine. This is not a personal finance podcast at all, but when I’m done with today’s theme, you’ll be able to take advantage of benefits good for your health and maybe even your pocketbook.
The main concept here is that health savings accounts, or HSAs, and flexible spending accounts, or FSAs, have pre-tax money that you can spend on various healthcare items. I’m not here to give you tax or investment advice but I do want to point out a bunch of facts about these plans that are helpful. Most of time, you sign up for either plan via your work. The HSA is easier to understand so we’ll start there—with this account, you or your employer make tax-deductible contributions which you can use for things like medical visit copays and prescriptions. A couple neat facts about HSAs are that your unspent money generally rolls over every year and that you can invest those funds like you would an IRA or 401(k). This all sounds wonderful but there are some limits, with the major constraint being that you can only qualify for an HSA if you have something called a high deductible health plan. I’ve talked about deductibles before in past episodes but the short story is that your insurance may require you to spend a certain amount out of pocket before coverage applies. The IRS defines these plans as having a deductible of $1400+ for individuals and $2800+ for families. This is why HSAs are helpful, because if you’re spending money for medical help anyway, you get a little tax relief on top. The max amount you can contribute to an HSA in 2022 is $3650 as an individual or $7300 for a family. These numbers change every year based on inflation and the IRS’s assessments. Whether you get an HSA through an employer or in some cases fund it yourself, the institution or bank who keeps that account will usually give you a debit card for your medical expenses. Even if you have or don’t have an HSA card, you should keep receipts for anything you buy with that account, so you can easily lock in whatever reimbursement you need as long as the money goes toward something eligible.
Thankfully you can find lists of eligible medical expenses from both the IRS and HSA bank websites—I’ll link both of those resources on my post at rushinagalla.substack.com. It also doesn’t hurt to check to the original HSA or FSA plan document you get at the beginning to see the specific expenses that are okay for reimbursement. Some employers have more or less restrictions on what you can use the money for beyond whatever the IRS outlines. You don’t need a high deductible health plan to get an FSA. However, only an employer can give you an FSA. The confusing part happens when you realize there is more than one type of FSA. This is just classic healthcare making life complicated, but I’ll break down the major kinds of FSAs. Although your average FSA can fund medical costs just like the HSA, some companies offer a limited-use version with money that can only be used for dental and vision care. You might also see a dependent care plan, or DCFSA, meant for child care, elder care, or some preschool services. It’s actually possible to have both an HSA and FSA. In that situation, your FSA would be limited to vision and dental or dependent care facilities. Unlike the HSA though, you can’t rollover all your unspent funds. The IRS has a 20% contribution rollover limit for FSAs every year but your employer makes the final decision on what is okay. Because of the pandemic and the recent American Rescue Plan, there are exceptions in place so you can ask your tax preparer about that if needed. For 2022, the contribution limit for a traditional medical FSA is $2850 for individuals. DCFSAs have a $5000 annual limit for individuals but are also subject to change. If you have the luxury of being able to choose between an HSA and FSA, you should think about your medical habits and tendencies so you can make the most of either plan.
Regardless of the account you have, keep your receipts—if you ever need to send them to an administrator, your reimbursements will be easy to get. For example, you shouldn’t hesitate to ask for an itemized statement from the medical office or pharmacy you go to often. Let’s pump the brakes for a bit. The reason why I’m spending time walking you though all these items is that not everyone qualifying for these accounts takes advantage of or even knows about them! The Journal of the American Medical Association held a survey in 2016 and then reviewed their findings in 2020 for adults with high deductible health plans who have or can get an HSA. The AMA’s study classified high deductible health plans with a benchmark of $1300+ for individuals and $2600+ for families (both upper limits are slightly below the IRS’s definition). The sample of people who got interviewed were ages 18-64, all of whom had a high deductible plan for at least 12 months. The results found that just one in three people actually opened an HSA account and even fewer contributed to their respective accounts in the last year. All of this is the case while the share of privately insured adults with high deductible plans went from 25% in 2010 to 40% in 2016. In essence, patients have more out of pocket responsibilities but aren’t taking advantage of HSA or FSA benefits that offset those issues. These trends are why I want to call attention to the fact that it's worth your time to check with your employer or tax guy if you qualify for those accounts. Just remember that if you actually get an HSA or FSA, save your account policy document and your receipts to make the reimbursement smooth.
No matter how you choose to spend all that hard-earned pre-tax money, expenses should be taken care of at a clinic that treats you well. In the next post, you’ll learn how to spot all the red and green flags of medical clinics. Subscribe and stay tuned to Friendly Neighborhood Patient for more healthcare commentary. I’ll catch you at the next episode.
