What does your HSA cover?
What does your HSA cover?
It is important to know the difference between an HSA and FSA health insurance plan.
Date Published: Nov 21 2011
Health Savings Accounts on the rise
According to America's Health Insurance Plans, an industry trade group, more than 11 million Americans have a Health Savings Account (HSA), up 87 percent from 2008. Indiana has the 10th highest number of HSA enrollees in the nation. Still, only about 33 percent of Angie's List members who took a recent online poll reported having an HSA, compared to 73 percent who have and contribute money to an FSA.
Unlike an FSA, money in an HSA rolls over every year, and by law HSAs must be paired with a high-deductible health insurance plan, which is no less than $1,200 for an individual and $2,400 for a family. Employees can deduct their HSA contributions from their income, and earnings on the money are tax-free if spent on eligible medical expenses.
Employers are embracing HSAs as a way to control the rising cost of health benefits, but Pete Dunn, highly rated financial planner and owner of Pete the Planner in Carmel, says an HSA can be a win-win for employer and employee. "HSAs significantly reduce the cost of health insurance for employers, and when people avoid unnecessary doctor visits, they're rewarded by keeping the money in their HSAs," Dunn says.
HSAs vs. FSAs
While FSAs only can be offered by employers, anyone can open an HSA as long as it is a high-deductible health insurance plan. Banks, brokerages and other entities offer HSAs, but as with any bank account, the fees and policies vary and it pays to shop around, experts say.
Angie's List member Bill Stafford of Zionsville has had an HSA for three years and likes having the account to pay for prescriptions and dental care such as root canals. "It's advantageous to be able to pay with pretax dollars," he says, adding he contributes $3,500 each year to his account.
However, there are some potential drawbacks. "You often don't have a copay and end up paying the deductible," Dunn says. "But HSAs are the ultimate cost-saving alternative for healthy individuals."
The holidays aren't the only reason for year-end spending: Many Angie's List members go on a health care spending spree to deplete "use it or lose it" money in their health Flexible Spending Accounts.
At the end of 2010, Chuck Zwolle of Indianapolis found himself with nearly $3,000 left over in his FSA at year's end. He made an appointment with A-rated Price Vision Group in Indianapolis for a Lasik consultation. "I had always wanted Lasik done," says the computer programmer. "So my wife said, 'Now is your chance!' It worked out really well."
Seventy-eight percent of Angie's List members who responded to an online poll say their employer offers an FSA, and of those, 73 percent say they put money in it. Nationwide, about a quarter of employees with access to an FSA actually use it, according to human resources consulting firm Mercer.
FSAs allow people to set aside money for eligible health-related expenses for themselves and their dependents while offering tax savings. Any funds left over at the end of the year are forfeited to your employer. To try to use up their FSA money, members say they most often schedule appointments for dental care and orthodontics, eye care and Lasik surgery, dermatology, and chiropractic care.
The IRS sets guidelines as to what is covered under an FSA and what isn't. Smoking cessation classes, for one, are eligible, but over-the-counter nicotine gum and similar items aren't. Breast reconstruction after a mastectomy is eligible, but not cosmetic breast enhancement or other cosmetic procedures such as teeth whitening. Acupuncture, fertility treatments and psychiatric care are also reimbursable.
The money is taken out "pretax," meaning it reduces the amount of income subject to federal taxes and in most states, including Indiana, state and local taxes. "That's the beauty of an FSA," says Charles Thompson, an A-rated certified public accountant in Indianapolis. "It's 100-percent tax-free money." The savings can be significant, Thompson says. A person paying 30 percent in taxes who sets aside $2,500 in an FSA would save $750. Employers determine the annual maximum amount you can contribute, but the average annual contribution is $1,500. Beginning in January 2013, federal law will cap the annual contribution amount at $2,500. Lawmakers imposed the cap, part of the Affordable Care Act of 2010, to increase taxable items and income.
Before putting money into an FSA, experts recommend contacting your financial planner or accountant and carefully consider how much to invest. "Be sure to estimate your health care expenses conservatively and review them before enrolling," says Linda Jeglinski, director of flex spending administration with BAS, a health management solutions provider in the Midwest. "Some companies have added grace periods, so if you haven't spent all the amounts in your FSA account by the end of the year, you may have a few more months to exhaust the balance."
Although it's not required for employers to offer it, Jeglinski says grace periods extend the health insurance plan year to March 15. During this time, employees can incur expenses and seek reimbursement from the previous year's funds.
A recent survey from United Healthcare, an insurance provider, says people usually spend one hour or less making their benefit decisions each year, which doesn't surprise Paul Bogdanoff, an A-rated certified public accountant with Bogdanoff Henderson PC in Indianapolis. "I don't think the general population spends nearly enough time thinking about what they need [for] medical expenses," he says. "Once you know when your open enrollment is, you should sit down, go through receipts, and try to anticipate what your health costs will be for the coming year."
Any money that isn't used during the year is typically retained by your employer, which must follow IRS guidelines about how to spend it. The majority of employers put the money toward future health care expenses, says Brittany Rhea Luebke, product marketing manager with benefit advisor FirstPerson in Indianapolis. But less than $100 on average is forfeited by plan participants, adds Jody Dietel, chief compliance officer with WageWorks, the nation's largest insurance benefits administrators.
A bill pending in Congress, HR 1004, seeks to remove the "use it or lose it" provision so employees can get back unspent money, rather than scrambling to use up FSA money at the end of every year. As of press time, the bill had been stalled in committee since March. "There's always hope," says Josh Gillespie, communications director for Rep. Dan Burton, R-Ind., one of the co-sponsors.
Unlike other tax-advantaged arrangements like Health Savings Accounts, the total FSA amount set aside by the employee is available in January, even though it will be deducted in equal amounts from each paycheck throughout the year.
Each winter Tony Sterrett, the practice administrator for Price Vision, says they experience an influx of requests to schedule Lasik - which starts at $995 per eye. "We increase our clinic and surgical availability to accommodate the increased demand," Sterrett says, adding while it may not be difficult to get an appointment it's still best to call early to get on the books. "We always ask patients to have an exam to determine if they're a candidate for Lasik before they make FSA arrangements."
Member Richard Brayfield of Noblesville says he's had an FSA for five years, but it took a few years to get the contribution just right. He uses the funds for doctors' appointments and MRIs, but will buy prescriptions and replacement CPAP machine equipment with any leftover money. "The first year, I used it up midway through the year," he says, adding he now puts away around $7,000 to cover his and his wife's medical expenses. "But now with experience, I can pretty much hit the targeted budget."
Dr. Jeffrey Biggs, an orthodontist with A-rated Sondhi-Biggs Orthodontics in Indianapolis, says during the last three months of the year, they're getting calls from those who need to spend and those who need to plan ahead. "Oftentimes, the patients are seeking advice for future orthodontic needs and have a deadline to meet to set aside funds for the upcoming calendar year," Biggs says. "Having a consultation and understanding the treatment recommendations helps them prepare."
As a mother of four, Angie's List member Kim Modglin of Indianapolis knows the importance of planning ahead. The registered nurse says she's had an FSA for more than eight years. Because she consults with her family's physicians before deciding how much to contribute to her FSA, she doesn't rush to schedule year-end procedures.
"When I explain why I need to know the costs, the providers I use have been very helpful and understanding," she says, adding she uses her FSA to pay for orthodontic and eye care. "I think they realize I don't have a money tree in the backyard!