Health Spending Accounts: A Complement to Regular Health Insurance

How They Work

FSAs may be offered by your employer in addition to your regular health plan. They are also known as cafeteria plans because they offer you a variety of coverage options.

You can choose your FSA during your company's open enrollment period at the end of the year. This is the time when you pick your healthcare options for the upcoming year. At that time, you select the amount of money you want taken from your paycheck every month (before taxes are taken out). The money is placed into your flexible spending account and goes toward paying your medical bills during the year.

You choose this amount by predicting the cost of any medical services or products you expect to have over the year. It can include things like prescription medicines and therapy. You save money because you do not pay tax on these deductions. You will want to try to use all the money. You may give up any money that cannot be not rolled over from year to year.

An advantage to using this account is that you can spend up to the total you will be investing for the year. You do not need to wait for your monthly deductions to add up to the amount you need.

Caution

You need to plan well and stay organized to benefit from an FSA. You will need to have good records of what you spend on healthcare. This can help you estimate how much you need in the FSA. The amount will be taken out of your paycheck and can only be spent on healthcare. You also can't change the amount of your monthly deduction until the next open enrollment period.

You will also need to keep track of your health spending and submit all your receipts. The total of these receipts will then be subtracted from your FSA and reimbursed to you. Some FSAs give you a debit card to use for purchases, but you will still need to keep good records.

How They Work

As with an FSA, you (or your employer) contribute to your medical savings account and the contributions are tax-deductible.

Unlike FSAs, the unused money does roll over from year to year. It also earns interest. Interest rates are usually set by the insurer who maintains the account for the employer or individual.

The earnings may go to your employer if your company sponsors the plan. They may go to you if you are self-employed.

You may only be eligible for an MSA if you have a high deductible health plan. This is a plan that requires you to pay out a high amount each year before it pays the bulk of the cost. The reason behind this is that high-deductible plans usually have low co-pays for office visits and cheaper monthly premiums (payments). This amounts to added savings on top of what you save by investing the money tax-free.

Caution Points

MSAs save you money as long as you stay well for a long time after you sign up and that you spend wisely for any care you need. But if anything goes wrong it could cause problems for people with limited incomes. One injury or illness can empty the account. It may also be thousands of dollars before you satisfy your out-of-pocket maximum before your insurance plan picks up the rest.

You will have to pay taxes if you use any of your unused MSA money for reasons other than health expenses. A penalty is also added.

An MSA can be helpful as long as you plan wisely. Think it through with care. Weigh your risk of becoming sick or injured before you enroll.