Fall is Open Enrollment, which is that time of year when individuals choose their health insurance benefits for the next calendar year. Many people are familiar with flexible spending accounts (FSA) that allow employees to put earnings into an account, before employment taxes are taken out, to be used as qualified health care expenses. The benefits of the FSA include the reduction in taxable income and a dedicated account for healthcare expenses.
The downside to FSAs is that if you do not use all that money before the end of the calendar year, you lose it. The money goes back to the employer who can use it in the FSA or to help with the administrative costs of the FSA. Consequently, people will underfund the FSA because they do not want to lose the money that they were not able to spend on medical expenses. But there is another health care savings vehicle that is less widely used, but could be a significant tool for savings and covering medical expenses- the health savings account (HSA).
In 2003, Congress established the HSA with the requirement that only individuals enrolled in a high deductible health plan (HDHP) can fund an HSA. A HDHP has lower premiums but higher deductibles, which makes it attractive to individuals without health problems and the wealthier who can afford the higher deductibles. The HSA is similar to an FSA in that the employee can contribute earnings before taxes in order to reduce taxable income. Also like an FSA, HSA funds can be used for qualified medical and dental expenses, including those medical expenses incurred before the deductible is met.
The key difference between an FSA and an HSA is that the money in the HSA does not need to be spent within the calendar year; there is no “lose it” provision. In addition, if an individual accumulates sufficient funds in the HSA, there are investment opportunities for increased savings. Finally, the contributions and any capital gains from HSA investments are tax free as long as the HSA funds are spent on qualified medical and dental expenses. Health spending accounts provide many financial benefits to enrollees.
However, coupling the HSA with a HDHP diminishes its appeal and usage. Many individuals are not able to afford the high deductible due to income level or health conditions. The HSA needs to be freed from the restriction of only being available when an individual is in a high deductible health plan to make it available for everyone. Encouraging savings for health care expenses needs to be a top priority for Americans of all ages. Keep in mind that even Medicare has deductibles and other out of pocket expenses.
Just like saving for retirement, the sooner you start saving and investing for health care expenses, the better off you will be. Secondly, giving patients more control of their health care spending provides an incentive for comparison shopping. Combined with price transparency, widespread use of HSAs could help contain health care costs by forcing the providers to compete on prices. The health savings accounts could be powerful tools for enabling many Americans to pay for health care expenses; it is time to make them available to everyone regardless of enrollment in a high deductible health plan.