Sunday, October 21, 2012

What the FSA?

It's that time of year again when many of us get a chance to consider "benefit" choices for the coming calendar year.  I try to look at every possible way to save a buck.  This is not to say that I don't like to spend money; I do (and am continuing to learn the pleasures of spending money from my kids).

Saving is not buying something you don't need or something inferior to what you want because it's cheap.  Saving is all about getting what you want at the best price.  And so it is with health care.  In this blog, I'm going to talk about 2 strategies for setting aside tax-free money for the purpose of purchasing health care.  I have had personal experiences with both.

Health Savings Accounts (HSA) - These accounts require that you also have a qualified High Deductible Health Plan (HDHP).  As the name implies these are health insurance plans that have a high deductible.  For family plans, the minimum deductible is $2,500 for 2013; the deductible for the HDHP that I had was $3000 for in network care... not an inconsequential amount.  In addition to the distaste of a very high up front cost I will note that a second turn off that I found with this option is that HSA are very confusing for the layperson.   For example, for HSA, dependent eligibility is defined through the federal tax definition of dependent.  Thus, while your High Deductible Health Plan (your insurance) may cover dependents up to age 26, your HSA (account money) can only be used to pay for health care for dependents under 18 (or other special IRS defined dependents).

It is recommended that you fund your HSA as soon as possible in the calendar year.  This makes sense.  For example, if you encounter $1000 in medical expenses in January, but you only have funded $250 in your HSA, you can only apply $250 to this $1000 expense.  Thus, between the prospect of a high deductible and need to fund your HSA fast and early, you may find that the HDHP with a HSA may not be for you if you are cash tight.

Despite the high deductible and the need to cash up front, this option merits consideration.  First, your premiums are often significantly smaller for HDHPs than for traditional health plans.  Second, you are able to set pre-tax dollars aside to cover health care. In recent years, this is amount is over $6000 for families that you can avoid paying income taxes on.  Also, you may find that in some cases, part of the premium you pay may be passed into a HSA established for you.  All money placed in an HSA is your money and you can use it to pay for your health care for your lifetime.

Flexible Spending Accounts (FSA) are a great option for folks who have traditional health insurance but want to set aside some pre-tax dollars to pay for health care.  The biggest drawback to the FSA is that you need to guess-timate your health care expenses for the year.  (Recently, they have extended a few extra months into the new calendar year to help consumers spend FSA Funds).  Simply stated if you don't use your FSA money you loose it.  If you establish a FSA for $5,000, but only have $1500 in qualified medical expenses in the covered term you loose $3500.

In some (predictable) situations, a FSA can be a fantastic deal.  Most notably, even though your FSA deduction is typically pro-rated within your pay check through the full year, the full amount is available on day one of the calendar year.  For example, I had an occasion where I knew my child needed braces.  I was able to get an estimate late in the calendar year so that I knew in advance the health care cost.  I also inquired and confirmed that if I paid cash up front, the orthodontist would provide an additional discount.  If you schedule treatment to begin in January, you can obtain the full amount of your FSA (even though you haven't paid into it in full).  So say you establish $5,000 for your FSA, you can get the full $5,000 in January even though this amount is pro-rated from your payroll check through the year.  So essentially, you can get a $5,000 loan with no interest, plus a discount for cash payment from the provider plus you don't have to pay taxes on $5,000.

An unfortunate victim of recent health care reform is that you can no longer use HSA or FSA money to purchase over the counter (OTC) medicines unless you have a doctor's prescription.  While I realize some diligent savers may be willing to do this extra step and it may be worthwhile to consider asking for during an office visit.  However, for most of us, this is a significant impediment as we will not harass our doctors for the many OTC needs that we may have (such as allergy medications, pain relievers, acid reduction medications and the many other medications which are now available as OTC).

A second misfortune for FSA under Affordable Health Care is that the maximum amount has been reduced to $2500.  This is a substantial reduction from the prior amount of $5000 that my plan permitted previously.  There has been some discussion as to whether there should be some relief in regards to the "use or loose" provision in light of this reduction.  This would certainly make this benefit more attractive and would provide some much needed balm in an environment where individuals continue to shoulder ever rising health care costs.

So some recommendations based on my experience:

If you are 20 - 40 years of age and in great physical health, a HDHP may be worth a look; otherwise, I would take a pass on this option.  As you age your risk of a catastrophic health event increases substantially.  The savings with this type of plan is if you stay healthy with only routine office visits.  A single trip to the emergency room or an overnight hospitalization will put you well on your way to paying all of your high deductible - ditto, should you require extended specialty care.  Simply stated if fate rears it ugly head (as it did for me) this plan can quickly turn into an expensive option.  I don't think it is worth the gamble for anyone over 40, anyone with health issues or anyone with active kids (yes, sports injuries can be expensive, too).   For these groups, I don't feel the risk and the headache justifies the potential savings.

FSAs are great for health needs that you can plan for.  For example, if you need eyeglasses or contacts that aren't covered by your major medical plan, this is a great option.  If your kids need braces, this is a great option.  If there are known co-pays for medications or office visits that you are confidant you will need, this is a great option.  Due to "use or loose" this benefit must be used conservatively and you should only budget for those allowed medical expenses that you know you will expend in the benefit year.  Lastly, stay tuned for potential changes to FSA - if "use or loose" is addressed (and depending how it is addressed), FSA could become a more attractive vehicle for unplanned medical expenses. But for now with OTCs disallowed and a paltry maximum of $2500, I'm left to say, "What the FSA, this is Affordable Health Care?"

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