Health Spending Accounts: A Complement to Regular Health Insurance
Consumers—and insurers, too—are always on the lookout for ways to save money on health plans. Health spending accounts (HSAs) were developed with this goal in mind, and they offer a number of unique opportunities.
Two examples of HSAs include flexible spending accounts (FSA) and medical savings accounts (MSA). Under both types, you can put away money for healthcare and health-related purchases, and you also are given flexibility as to how to spend it.
Individual plans specify exactly what will be covered. Generally, HSAs can be used to pay for the following:
- Prescription medicines
- Over-the-counter medicines—After January 1, 2011, over-the-counter medicines will only be covered under certain circumstances (eg, if you have a note from your doctor).
- Birth control
- Hearing aids
- Contact lenses
- Dental care
- Mental health care
- Alternative therapies (eg, ]]>acupuncture]]>)
- Many other treatments and services depending on your plan
In some cases, the account will cover other expenses, such as changes made to your home because of a disability. And some plans can be used to pay for childcare and the care of adults who are your dependents. For a complete list of services covered, check with your individual plan.
Flexible Spending Accounts
How They Work
FSAs may be offered by your employer in addition to your regular health plan. They are also known as "cafeteria plans" because, just as if you were selecting food from a cafeteria line, they offer you a variety of coverage options.
When you enroll in an FSA, you need to select your healthcare options for the following year during an open enrollment season at the end of the previous year. At this time, you stipulate the amount of money you want deducted from your paycheck every month (before taxes are taken out) and placed into your flexible spending account, which goes toward paying your medical bills during the year.
You choose this amount by predicting the cost of any medical services or products you expect to accumulate over the year, including the cost of over-the-counter medicines, therapy, etc. Again, you do not pay taxes on these deductions, and that is where the savings come in. But, it is a use-it-or-lose-it deal. If you do not use all the money, you forfeit it because it is not rolled over from year to year.
An advantage of FSAs is that you can spend up to the total amount you will be investing for the year (in the form of monthly deductions from your paycheck) before you have actually invested it all.
You need to plan well and stay organized to benefit from a FSA. First of all, you will need to have good records of what you have spent on healthcare over the years so you can make an accurate estimate of how much you will spend over the following year. This is the amount you will be deducting from your paycheck—with no hopes of seeing it again for purposes other than your healthcare. And you cannot change the amount of your monthly deduction until the next open enrollment period, even if you discover you have estimated the wrong amount.
Furthermore, you need to keep track of everything you spend on health services and products and submit all your receipts. The total of these receipts will then be subtracted from your FSA and reimbursed to you. Under some types of flexible spending accounts, you are given a debit card for the account so that you do not have to lay out additional cash, but this still requires you to keep records.
Medical Savings Accounts
How They Work
As with an FSA, you (or your employer) contribute to your medical savings account and the contributions are tax-deductible.
Unlike FSAs, however, the unused money does roll over from year to year, and it also earns interest. Interest rates are usually set by the insurer who maintains the account for the employer or individual.
The earnings may go to your employer if your company sponsors the plan, but these accounts may also be available privately if you are self-employed.
You are only eligible for an MSA if you also have a "high deductible" health plan—ie, one which requires you to pay out a relatively high amount each year before it picks up the bulk of the cost. The reason behind this requirement is that high-deductible plans usually have low co-pays for office visits and cheaper monthly premiums (payments). This amounts to added savings on top of what you save by investing the money tax-free.
MSAs save you money as long as you stay well for a long time after signing up for them and assuming you spend wisely for any care you do need along the way. With this in mind, these accounts do generally include information on living a healthy life and purchasing care wisely.
But if anything goes wrong, it could be devastating, especially for anyone who is low-income. One injury or illness can not only wipe out the account, but can cost thousands of additional dollars before you satisfy your "out-of -pocket maximum," or what you will be responsible for paying overall in deductibles, co-pays, and other expenses before your insurance plan picks up the rest.
If you use any of your unused MSA money for reasons other than health expenses, you have to pay taxes on it and a penalty is added.
In the end, with good planning and a little luck, an MSA can put you ahead. But think things out carefully, and consider your risk of becoming sick or injured before you enroll.
Health Savings Accounts
United States Department of the Treasury
US Department of Labor
Aetna. Health care FSA. Aetna website. Available at: http://www.aetna.com/members/fsa/spendingAccounts/HealthFSA/healthcarefsa.html. Accessed June 22, 2010.
HAS frequently asked questions. United States Department of the Treasury website. Available at: http://www.treas.gov/offices/public-affairs/hsa/faq_contributing.shtml#hsa3 . Updated November 19, 2008. Accessed June 22, 2010.
Health spending accounts. Bureau of Labor Statistics, US Department of Labor website. Available at: http://www.bls.gov/opub/cwc/cm20031022ar01p1.htm#appendix . Updated December 2003. Accessed August 26, 2008.
HSA for America. HSA qualified expenses. HSA for America website. Available at: http://www.health--savings--accounts.com/qualified-expenses.htm. Accessed June 22, 2010.
HSAs: top ten questions. US Office of Personnel Management website. Available at: https://www.fsafeds.com/fsafeds/faq.asp#tt2 . Accessed August 26, 2008.
Mason K. What health care reform means for you. Web CPA website. Available at: http://www.webcpa.com/news/What-Health-Care-Reform-Means-for-You-54711-1.html. Published June 22, 2010. Accessed June 22, 2010.
Robinson JC. Health savings accounts—the ownership society in healthcare. N Engl J Med . 2005;352:1199-1202.
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Last reviewed June 2010 by ]]>Brian Randall, MD]]>
Please be aware that this information is provided to supplement the care provided by your physician. It is neither intended nor implied to be a substitute for professional medical advice. CALL YOUR HEALTHCARE PROVIDER IMMEDIATELY IF YOU THINK YOU MAY HAVE A MEDICAL EMERGENCY. Always seek the advice of your physician or other qualified health provider prior to starting any new treatment or with any questions you may have regarding a medical condition.
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