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FSA vs. HSA: Making Sense of the Choices
Everyone is aware of the high costs of health care. In fact, health care spending accounted for $2.3 trillion per year — or $7,681 per person — based on a recent government analysis. According to the California Society of CPAs (www.calcpa.org), there are some tax-advantaged options to help pay for medical or prescription costs.
All About FSAs
You may already be familiar with one choice, a flexible spending account. FSAs, which are offered by employers, can be used to cover medical expenses that are not paid by your health insurance. These might include deductibles, co-pays or other costs. The employee contributes a portion of his or her salary to an FSA on a pre-tax basis, which means you do not pay tax on that money. You choose how much you want to contribute each year, and it’s an important choice, because you lose any unused funds at yearend.
Keep in mind, that effective January 1, 2011, the cost of over-the-counter drugs will not qualify for reimbursement in a FSA. But, over-the-counter medicines prescribed by a doctor will qualify. In addition, certain medical products such as saline solution, reading glasses, bandages, etc., will continue to qualify.
By contrast, you will not lose the money you contribute to a health savings account, but the rules for qualifying are quite different. While anyone can contribute to an employer FSA, you can only participate in an HSA if you have an insurance plan with a high-deductible. That’s often the case among self-employed people, although some employers might offer a high-deductible plan, as well.
The definition of “high-deductible” can change each year. For example, in 2010 your plan deductible must be at least $1,200 for employee-only insurance and $2,400 for family coverage. There are also limits on the amount of pre-tax contributions you can make to an HSA each year. In 2010, they are $3,050 for employee-only coverage and $6,150 for family coverage. You can use the funds in these accounts to pay for unreimbursed medical expenses and, in some cases, to pay for other health care coverage, such as COBRA health insurance payments.
High-deductible plans often carry lower premiums, so you are essentially making a tradeoff: Pay less money each month for insurance, but set aside some funds in an HSA in case you do face high medical expenses. An HSA may be provided by your employer or you might choose one offered by a bank or other financial institution.
Since there are choices available with HSAs, it’s important to understand what they are before you choose an account. Find out, for example, what fees might be involved. Just as is the case with a checking account, you might encounter monthly fees or charges for every transaction, including transfers and overdrafts. The financial institution should be able to give you a schedule of fees so that you can make comparisons among your options.
Payment options may be another consideration. Most accounts provide you with a debit card or checks that you can use to pay for health-related costs, but some require you to file reimbursement forms, which can be inconvenient and cause slower payments. Some accounts allow you to invest your money in mutual funds or other investments, but most consumers maintain their funds in a savings or money market account. Of course, you’ll want to check the security of an online account and ensure that the privacy of your information is protected.
Your CPA Can Help
Health care expenses take a big bite out of many family budgets, so it’s important to understand your options for lowering those costs. If you want to learn more about these accounts — or about any other issues affecting your family’s finances — turn to your local CPA. He or she can offer the advice you need to make the best decisions on your finances.
Copyright 2010 American Institute of Certified Public Accountants.
The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.
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