Flexible Spending Accounts (FSA): An Alternative to HSAs
October 4, 2019
How would you like to get a discount on your doctor’s bills and pay less taxes? In our last post, we introduced a high deductible health plan (HDHP) with a Health Savings Account (HSA). However, there is a bit of risk when enrolling into an HDHP. The major risk involved Is HDHPs have a higher deductible (the amount of money you will spend before your health insurance begins to help pay) and higher maximum out of pocket (the maximum amount of money you will need to spend on your expenses in one year) than non-HDHP health insurance. For that reason, I typically do not advise people with pre-existing health problems requiring frequent attention to enroll into an HDHP. However, boys and girls, gather close. Let Matt Broke explain something to you – Flexible Spending Accounts (FSA) – are an excellent alternative to HSAs.
Before we begin, because health insurance is a
complex topic to understand, here are some terms you have to understand:
Premium: what you have to pay each month
Out of pocket costs: Any additional costs you have to pay in addition to your premium
Deductible: a type of out of pocket cost that you must pay before your insurance starts paying
Coinsurance: a type of out of pocket cost that you must pay after your deductible (usually a percentage)
Co-pay: a type of out of pocket cost that you must pay when you visit your doctor
Coverage: What your insurance covers. This can speak to the type of procedures and/or how much you pay for your insurance.
High Deductible Health Plan (HDHP): A health plan type that is typically paired with a Health Savings Account (HSA). These plans have a high deductible as defined by the Internal Revenue Service which is over $1,350 in 2019 ($1,400 in 2020).
Health Spending Account: These are special accounts that are set up by an employer or an individual. You are allowed to contribute a certain amount of money each year which is only allowed to be spent on qualified medical expenses.
is an FSA?
A Flexible Spending Accounts (FSA) are a type of health spending account that allows you to contribute pre-tax dollars to pay for qualified medical expenses. There are three different types of FSAs. They are:
Health Flexible Spending Accounts (Health FSA): This one is the most common type of FSA and is the main focus of this post
Limited Health Flexible Spending Accounts (Limited FSA): These FSAs cover only dental and vision medical expenses.
Dependent Care Flexible Spending Accounts (Dependent Care FSA): This FSA is typically used for child care costs for children under 13.
There are two major criteria for a Health FSA. The first is you must have an employer that offers an FSA. This major criterion is true for all three types of FSAs. If your employer does not offer an FSA, there is no option for you to set up your own FSA instead. Additionally, the second major criteria is that you cannot enroll in an HDHP and simultaneously contribute to both your HSA and FSA. The only exception to this rule is if the FSA is a Limited Health FSA or a Dependent Care FSA.
FSAs are set up by your employer and
allow you to contribute pre-tax dollars up to a certain amount. Pre-tax dollars
are taken out of your paycheck before tax and placed into the FSA. The
contribution amounts are: $2,700 (2019) (TBA for 2020) for Health FSAs, $2,700
(2019) (TBA for 2020) for Limited FSAs, and $5,000 for Dependent Care FSAs (2019)
(TBA for 2020).
What happens with the money you
For Health and Limited FSAs, the money you contributed is used to reimburse or pay for any qualified medical expenses you might have. Interestingly, for Health FSAs “medical expenses” is a broad category which may include sunscreen, massages, and other items you can pick up at a local store. As long as you are not using your Health FSA to pay for your premium, you can use your FSA for many different medical expenses for you, your spouse, or dependent. For instance, I have used my Health FSA to pay for my wife’s deductibles, vision, and dental procedures. A limited FSA, “qualified medical expenses” are only limited to vision and dental procedures.
Dependent Care FSAs are in their own category, you can use the pre-tax money to pay for eligible dependent care services. This includes anything from summer school, camps, before or after school programs for children. Additionally, if you have a spouse or relative who is physically or mentally incapable of self-care and lives in your home, you can use the Dependent Care FSA on their expenses.
FSA Yearly Roll Over Amount
There is one catch to FSAs, you must
spend all your money by the end of the year or lose all the money you have
contributed. Unlike the HSA which we covered in our previous post, you cannot
roll over your money or invest your money. This means that there are limits to
using your FSA account. However, there is a minor caveat when it comes to FSAs
use it or lose it rule. You are allowed to roll over up to $500 (in 2020) every
year as long as you are enrolled in the FSA next year with the same employer.
Dependent Care FSAs and Limited FSAs are not as common, we will turn our focus
mainly on Health FSAs moving forward in this post.
Health FSAs largest strength is
allowing you to pay for qualified medical expenses using pre-tax dollars.
Depending on your salary level, a Health FSA can account up to a 30% of savings
on your qualified medical expenses. However, the strength of a Health FSA is it
allows you to have a health insurance that covers your needs and have a
discount on your medical expenses. Additionally, unlike the HSAs which are
coupled with HDHPs, non HDHP plans have much lower deductibles and maximum out
of pocket limits. Often, if you have a fully funded Health FSA, you are able to
cover most, if not all your expenses prior to meeting your maximum out of
pocket limits. Similar to HSAs, qualified medical expenses for Health FSAs are
in an extremely broad category that can include items you can pick up at a
local Target or Walmart. Additionally, if you are unable to spend all your
money in one year, you are able to roll over some of your money to the next
Health FSA cons really start and
ends at the fact at the use it or lose it rule of all money contributed to the
account. Any money you contribute must be used by the end of the plan year or
you lose the money you have contributed. You are only allowed to roll over $500
each year assuming that you have a Health FSA with the same employer the next
year. To illustrate this problem – try to predict all the medical emergencies
you’ll have in the next year. It is incredibly hard to forecast all your
problems for the next year, so the chances of losing your money is high –
unless you are certain you will be seeing the doctor quite often. You’ll often
see people who have budgeted too much money buy multiple massages and other “qualified
medical expenses” at the end of the year to use up their money. Additionally,
you may not always be with the same employer by the start of the next year.
Who Should Use A Health FSA?
I would breakdown the group of people who should use a Health FSA as 1. women who are planning to get pregnant or pregnant OR 2. People who shouldn’t get an HDHP with HSA, but still want tax advantages. Essentially, if you use/expect to use medical care very often and/or have conditions requiring medical attention, a Health FSA is your best bet.
Bill is 35 years old, obese, and sees the urgent care 4 times a years for various ailments
Annie is a 30 years old, pregnant, but generally healthy
Joanne is 56 years old, healthy and rarely sees the doctor
In this case, both Bill and Annie should consider a Health FSA. Both of them are not in a physical condition to have an HDHP with HSA. Pregnancies are very expensive, and the last thing you would want is to have a baby on an HDHP. Bill should strongly consider a Health FSA. Bill is young, but he is obese and goes to urgent care quite often. If Bill can lose the weight (and become healthier) and use his primary care instead of urgent care, I may reconsider. The only person that I would not recommend getting a Health FSA is Joanne. However, even if Joanne decides to use a Health FSA, it would not place herself in a terrible financial situation.
An FSA might be right for you or might be a terrible decision. The material and information contained on this website is for general information purposes only. You should not rely upon the material or information as a basis for making any business, legal, or any other decision. While we endeavor to keep the information up to date and correct, Bunny Hops To Wealth makes no representations or warranties of any kind, expressed or implied about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information in the above post. Any reliance you place on such material is therefore strictly at your own risk. Prior to making any health insurance decision, make sure you consult a health insurance expert before making any changes.
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