Unveiling the Mystery that is Medical Health Spending Accounts

Nowadays everyone is looking to save a buck. Because the cost of health care is rising while the coverage of health insurance is shrinking, most people with or without health insurance still end up paying a nice chunk of change each year in health related expenses. According to Healthconstitute.org in 2011, on average $4,547 was spent on health care services per person in the US.  Personal out-of-pocket spending averaged about $735 per person in the US. When you think about visiting the dentist twice a year, possibly filling a cavity, going to the general physician’s office, having blood work done, going to the eye doctor and getting a pair of glasses or contacts– it all adds up, even for a relatively healthy person. This is where medical health savings accounts (HSA) or flex-spending accounts (FSA)  will help you with these expenses.

Simply put both accounts are set up so that you and/or your employer contribute to at regular intervals (like every two weeks) via payroll deductions to be used only on approved expenses. While most people with get the HSA  or FSA through their jobs, you can usually open an account with an insurance company, bank or credit union. Either way the bonus is that money is deducted before taxes so you save on your taxes each year. Another good thing is that from day one you have access to the full amount even though you won’t finish depositing all of the funds till the end of the year. There are similarities between the two types of accounts but they are very different. It gets confusing because sometimes the words are used interchangeably and Health Savings Accounts are wrongly referred to as Health Spending Accounts.

An HSA (Health Savings Accounts) can only be used by people who have high deductible insurance plans. The laws change from year to year regarding how high that deductible must be to qualify to open an HSA. There are also limits as to how much money you can contribute each year to the account. It is a savings plan which means that you can rollover the balance from year to year or even transfer the balance to a new HSA account. The money there can only be used on qualified medical expenses, and if you withdraw for any other reason you will have to pay taxes and penalties on it.

An FSA on the other hand is a spending account. This might also be called a Health Spending Account. You are expected to spend the money in the account by the end of the year or you lose it. You can not roll it over to the next year. One bonus to the FSA is that besides medical expenses you can also use it on certain qualifying expenses such as day care. The downside is that since you can’t foresee the future, it’s hard to determine how much you are actually going to spend in the upcoming year in out-of-pocket medical expenses, so you may put too much or too little. Whatever you don’t use it by the end of the year you lose and the money goes back to your employer.

What expenses can be paid with your HSA or FSA account? Believe it or not, you can use it on almost any medical expense, with the FSA having the added benefit of being able to be used on certain other qualifying expenses as determined by the IRS, like child care. In some cases the you may have a separate FSA account to pay for qualifying expenses not related to health care. Co-pays, deductibles, and co-insurance payment associated with visits to your primary care doctor, optometrist, dentist, gynecologist, and other specialists are acceptable expenses. Prescriptions written by a doctor are included, as is most dental work, prescription glasses (this includes sunglasses) and contact lenses. As of 2011, over the counter medicines are excluded from this program. Elective services such as face lifts or breast implants are not covered, nor are things like non-prescription sunglasses.  Aetna has a nice formatted list of eligible and ineligible expenses here. (I don’t know how old it is as some things that are on there are no longer covered, like over the counter medications.)

There are two ways to use a HSA or a FSA. Most programs issue debit cards that link to the accounts and can be used right at the register for eligible expenses. Nice and easy. Sometimes if the debit account cannot verify that you are using it towards an actual medical expense (say a standalone credit card terminal) it may decline the card and require the patient to pay for the expense out of pocket.  The patient can then submit a receipt showing the eligible expense to the HSA  or FSA (usually online or to their HR department) and then they will take the money from the account and reimburse you. Some account programs require you to always pay out of pocket and then submit for reimbursement.

So what happens to the money left over in a FSA if it is not spent by the end of the year? Unlike an HSA, at the end of the year the funds left in an FSA do NOT rollover to the next year. Instead they go back to your employer, giving them a nice little end of year bonus. So make sure that if you have a FSA you use all of it before the end of the year!

Justin is a ABO certified licensed Optician. He has been in the optical industry for 8 years in different states and currently manages Optometry by Thanh-Vi Nguyen in La Quinta, CA. Follow his blog at  www.laquintaeyedoc.com

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