Health Savings Accounts – Health Spending Accounts

Insurance companies have blended high deductible health plans with savings accounts to create a category known as Consumer Driven Healthcare.  The idea is that, with the high deductible, you’ll be more careful as you are spending your own money and keep medical costs down.  Then, once you have reached your deductible, you can use your spending or saving account to pay for copays or coinsurance.

Federal tax laws allow some plans to set up accounts that allow you to pay for health costs with pretax money, meaning the contributions to the Savings Accounts or Spending Accounts are deducted from your paycheck before federal and Social Security taxes are withheld (sometimes state taxes too). These plans have some limits and requirements but are generally a good deal. Some common types are:

Flexible Spending Account (FSA): a pre-tax account where unspent balances may not be rolled over, other than for a limited grace period after each plan year.

Health Reimbursement Arrangement (HRA): an employer-funded pre-tax account where unspent balances may roll over from year to year. Typically offered in combination with high deductible plans.

Health Savings Account (HSA): a pre-tax savings account funded by employer or employee that may roll over from year to year and must be offered in combination with high deductible plans.

So if I go to the doctor for a boo-boo, and the bill is $100, and I haven’t met my deductible yet, and I have to pay the whole $100 myself:

  • It might take $140 or so before taxes to take home the $100 that I need to pay the doctor after the federal, state, and social security taxes are deducted.
  • Or it can take only $100 if I use a health savings account that lets me pay health bills with money before it is taxed.

Pros and Cons

Health Savings accounts let you save money from year to year and are generally a good idea if you are healthy or near retirement.  Unfortunately, predicting your health in the future isn’t an exact science.

On the downside, if you end up ending expensive care, then the high-deductible plans that are packaged with HSAs and HRAs might mean a lot of cash out of your pocket.

The money in your HSA/HRA account is yours to keep for as long as you want, but it needs to be spent on qualified medical expenses.  Withdrawal for nonmedical expenses will require you to pay income tax and a penalty on the funds.