What I’ve learned about healthcare plans - HSAs vs. FSAs according to one (bruised) MoneyLens Contributor
It’s no secret that the ins-and-outs of employer-sponsored healthcare can be tricky for the average mind to comprehend. Even after playing 20 questions with HR, many of us wind up going with the plan the person next to them in orientation recommended.
Speaking as someone who grew up with a physician as a dad and worked in his office, I thought I’d understand the healthcare jargon. I was still confused.
But take it from me, it is worth spending a little time to work out how these plans work.
FSA versus HSA
By my third job, I knew a thing or two about the employer-sponsored healthcare world and didn’t feel too daunted by choosing a healthcare plan. But as I scanned the options though, there were quite a few unfamiliar terms.
Flexible Spending Account? Health Savings Account? Surely there isn’t much difference, right?
“No” would be the correct assumption. Both of these accounts accompany your healthcare plan and allow you to contribute pre-tax funds to use for qualified health-related costs, but that is where the similarities end.
1) Flexible spending account (FSA)
If you have foreseeable or electable medical costs, like laser eye surgery, or for pre-existing conditions, then a Flexible Spending Account (FSA) could be a great option. It also comes in handy for large, up-front sums like contact lenses (bulk orders can save you money in the long-run but definitely take a toll on your immediate social spending).
These accounts are considered “use it or lose it”, therefore are best utilized for known upcoming health expenses or regular health expenditures. At the end of the year if you haven’t spent your money you contributed, it’s gone.
2) Healthcare saving account (HSA)
Unlike other health options (FSA), these funds roll over and accumulate year-to-year, earning tax-free interest. They are also only eligible for qualified high deductible healthcare plans.
If you don’t mind a high deductible or anticipate any immediate health care costs and want to build an additional safety net, the Health Savings Account (HSA) plans could be a better fit. They can be treated just like a 401K or individual retirement account (IRA). These funds can be invested, so you can grow your wealth just for future retirement needs or as additional capital for unforeseen circumstances. This could mean a car wreck or (in my case) an unexpected fall in a foreign country.
Life lesson number one
Unfortunately for me, with no clue what to do and no hope of deciphering all the technical jargon and fine print, I called upon an age old tactic: the previous experience and guidance of my co-workers. As soon as someone mentioned saving on my ever-increasing eye care costs, I checked the FSA box!
How did it turn out for me?
Everything was great for a few months. I put away enough for my contacts, new lenses in my glasses, and even covered a trip to the chiropractor, with money to spare! However, just two weeks before the new year, I got an email saying my FSA funds would soon expire. Expire?!
What I failed to understand was the duration of these funds. Had I read on, I would have seen the “use it or lose it” clause for all FSA plans. This means all the money I set aside needed to be spent, and fast.
After frantically searching for an assortment of eligible drug store items listed in my FSA plan, and filling my tiny Manhattan medicine cabinet to the brim, I was able to use most of the funds, with $75 left on the table.
Life lesson number two
I decided the next time I updated my healthcare plan to stick to the plain coverage. Medical expense accounts weren’t for me. I don’t have recurring, uncovered medical expenses, and as for elective surgeries, my eye doctor assures me laser surgery is a far-off dream for my constantly changing eyes. I also don’t have any dependents needing braces or retainers in the coming months. Instead of contributing my pre-tax dollars to health coverage, I decided to use the funds for other budget items and enjoy a little extra wiggle room at the end of each month and it felt great.
Right up until April 1, 2016 that is, when at the start of a long-anticipated vacation in Mexico, I fell. I fell fifteen feet to be exact, and believe me, it didn’t feel like an April Fool’s joke. One ambulance ride, two doctors, several X-Rays and a whopping $7,000 medical bill later, I was more than ready to go home.
However, the hospital needed payment, and my insurance company was closed for the weekend, which meant I needed to scrounge up the funds for the full payment before I could go back to US.
This is one of those times that any medical savings account might have come in handy. When I finally got my now broke-and broken- self back to the US, I did some digging and learned that really, either one would have been a huge help.
Both would have meant a reserve fund (and less credit card debt), and would have helped with the immediate costs incurred with my new doctors back home. Both could also have helped the following year.
With the continued care-costs, I could have elected to renew my FSA contributions. With a HSA, I could have relied upon the accounts for the payments. As HSA funds roll over each year, I could have sat back, relaxed, and suffered through the physical therapy, while my HSA potentially grew.
The bottom line
You have two great options at your disposal. Before you get overwhelmed by all the unfamiliar jargon, take a moment to research your options. Use all your resources to find the plan that best suits your lifestyle. Remember, you can never ask too many questions when it comes to healthcare, and planning for the truly unexpected.