Employer Sponsored Health Insurance
Employer sponsored health insurance is the cornerstone of the benefits package provided to all employees. The employer negotiates rates with insurance companies to provide their employees with medical, prescription, dental and vision benefits. The particular types of health insurance plans offered (such as HMOs, PPOs etc) will vary and the best selection for an individual will depend on their medical needs. However, one particular choice is a common source of confusion among young physicians – Health Savings Account (HSA) vs Flexible Savings account (FSA).
Flexible Spending Accounts
An FSA is a special account that can be used to pay for health care related expenses such as co-pays, deductibles and other health care costs. The maximum amount that can be contributed to this account is $2750 per year.
Advantages of FSAs
- A pre-tax account – The major advantage of using an FSA is that the money put into the account is taken out of your paycheck on a pre-tax basis. This allows you to spend more on health care expenses by saving on taxes. If your marginal tax rate is 30%, every $1000 you put into the FSA will save you $300 in taxes.
- A variety of ways to spend the FSA money – If you do not incur any healthcare expenses over the course of the year, you can spend the FSA account on a variety of other health care products. In fact, online retailers have specific FSA stores that sell FSA eligible items that can be bought without the need for a prescription. Buy eligible items online, submit the receipts and receive the money from your account.
Disadvantages of FSAs
- Use-it or lose-it policy - The major disadvantage of an FSA account is that it has a use-it or lose-it policy, where, at the end of the year, any unspent money is forfeited. It is sometimes difficult to plan our healthcare needs a year in advance – this makes determining how much to contribute to an FSA a guessing game.
Health Care Spending Account
An HSA is a health care account that can be opened in conjunction with a High Deductible Health Plan (HDHP) that can be used to pay for health care related expenses such as copays and deductibles. Your employer must offer a HDHP for you to have access to an HSA. The maximum amount that can be contributed to an HSA is $7200 for a family or $3600 for an individual. Unlike an FSA, the money in an HSA does not have to be used up every year and thus the HSA can be used to accumulate money every year. Furthermore, that money in the HSA account can be invested which allows for the opportunity for significant growth over the years.
Advantages of HSAs
- Triple tax free - The major advantage of an HSA is that it is a “triple tax-free account.” The money is contributed on a pre-tax basis, it can be invested and grows tax free, and can be withdrawn on a tax-free basis as long as it is used to pay for a qualified medical expense.
- Can function as a retirement account – An HSA can function as an additional retirement account for those who have already maxed out other pretax retirement accounts available to them. Funds can be saved in an HSA during the earning years and allowed to grow tax free over decades and only withdrawn in the retirement years to pay for qualified medical expenses. Saving healthcare receipts allows you to access HSA funds in early retirement even if you have no medical expenses at that time.
Disadvantages of HAS
- Not offered everywhere – For an individual to use an HSA, an employer has to offer an HDHP. These are not offered by all employers and thus an HSA is not be an option through such an employer.
- May not be the best healthcare plan - Even if an HDHP and an accompanying HSA is offered, this may not be the best health plan for an individual or family with high medical needs. By definition, a HDHP will require you to pay a higher deductible for each of your healthcare encounters until the maximum out-of-pocket cost is reached which can be as high as $14,000 per year. Such unexpected expenses can be managed by establishing a budget and setting up an emergency fund.
Choosing between an HSA and an FSA to manage your healthcare costs is an individual decision. The first step is to choose the best medical plan offered by your employer that meets your family’s needs taking into account healthcare needs, deductibles and co-pays. Once the medical plan is selected, then determine if you can use an FSA or an HSA to pay for your healthcare costs.
Furthermore, medical benefits selection is not a one-off event. Every year, during a time called open enrollment, an employee has an opportunity to review their benefit selections and make any changes without a penalty. It is important to review your selections annually and make any adjustments to suit your needs.