When you are comparing your different health insurance plans, you will undoubtedly come across a few acronyms that need decoding. The three that we are going to focus on today are the HSA (Health Savings Account), FSA (Flexible Spending Account), and HDHP (High-Deductible Health Plan). HSAs, FSAs, and high-deductible health plans were created to incentive people to save money for medical expenses while help controlling medical costs. The underlying idea is that if you incentivize people to save for medical expenses which is a good thing to do, people will be more diligent in using their own money than someone else’s. By the end of this article, you will be able to understand the essential functions of an HSA, FSA, and HDHP and the advantages and disadvantages of health savings accounts.
Health Savings Account (HSA)
Health Savings Accounts (HSAs) are used to save money for future medical expenses. You can think of these accounts as very similar to personal accounts but with limitations on how you can spend the money inside the account.
Like all health and insurance options, there are numerous advantages and disadvantages to having a health savings account. If you are generally healthy, want to save for medical expenses down the line, and receive a tax write-off for doing so, health savings accounts could be a good option for you. However, if you know you will have an expensive medical procedure or needs in the next year and meeting your high deductible would be a financial burden, the HSA might not be the best choice.
Ultimately having an HSA is a personal decision and should be based on your general health and wellbeing.
Advantages Of An HSA
- You have complete control over the money inside your HSA. You can shop for different providers that ultimately give you the care you need with the price and quality you feel comfortable with.
- How much you contribute to your health savings account is entirely up to you.
- Your employer can contribute to your HSA, but your account and the money inside the account are yours and move with you if you leave your job.
- An HSA is just like a regular savings account, with any unused money in the account rolling over to the following year.
- One significant benefit of an HSA is that you don’t pay taxes on any money going into your account.
- Depending on the specific health savings account, you have the option to invest your unused money. Any earnings from your HSA are also tax-free.
Disadvantages Of An HSA
- Life is unpredictable and so is an illness. It can be extremely difficult to budget for health care expenses.
- Finding information about the cost and quality of medical care can be exhausting and difficult to find.
- If you take any money out of your HSA for nonmedical expenses, you will be subject to taxes on the amount you took out.
- In order to qualify to open an HSA, you must have a high-deductible plan which could put undue financial stress on you.
- HSAs cap the amount you can deposit into your account in a given year. For 2021, the cap for individuals is $3,600 and $7,200 for a family account.
High-Deductible Health Plan (HDHP)
An HDHP is a health insurance plan that has a high deductible. Who would have guessed? A deductible is the amount you are required to pay each year before your medical coverage takes over the costs.
The deductibles start at $1,400 for individuals and $2,800 for families. These numbers can vary greatly based on the specific HDHP. The maximum deductible is capped at $7,000 for individuals and $14,000 for families. While these deductibles are high, the premium you pay is typically lower than other plans. (The premium is the fee you pay to obtain coverage for the duration of the plan.)
HDHP’s are becoming more and more common and are often the only plan businesses are offering. It is essential to look over the coverage details, especially the out-of-pocket maximum to know what you are fully signing up for. The out-of-pocket maximum is the total amount you can possibly pay for medical expenses in a year.
Flexible Spending Accounts (FSA)
An FSA is very similar to an HSA but with a few key differences:
- In an HSA, the account and the money inside the account is owned by you. With an FSA, the employer owns the account and you aren’t able to take it with you if you switch jobs or retire.
- With an FSA, you are not tied to an HDHP and you are open to shop for different types of plans without it affecting your eligibility.
- Contributions are tax-free up to a certain amount. For 2021, the amount was $2,750.
- Unlike an HSA where whatever you do not spend gets rolled into the following year, FSAs limit the amount that gets rolled in. The current rollover maximum is $550 a year and any amount over that in your account by year-end will be lost.
- In most cases, you are not allowed to have both an HSA and an FSA at the same time.
Conclusion
When navigating the world of health savings accounts, it is important to look at all your options to determine what is right for you. The tax benefits both the FSA and HSA offer are great and something that I personally take advantage of and attempt to maximize each year. However, that doesn’t mean it is right for everyone. It is important to take a good look at what your employer offers, what you can qualify for, and your medical history to make an informed decision. Being aware of the options you have available to you is half the battle and now you are equipped with some basic info to help make that decision a little easier.
