I vividly remember my first day at work. I was sitting at a table with my little auditing cohort, and we were completely overwhelmed by all of the firm benefits we were required to select. #firstworldproblems, I know.
It was kind of wild to me, because we were a bunch of accountants. Weren’t we supposed to have a handle on “business things?” While we all knew how to record journal entries and depreciate assets like our lives depended on it, most of us had no idea how much to contribute to our 401(k)s (much less how to strategically invest it) or how to choose a health insurance plan that would balance everyday costs and unforeseen medical needs.
I say all this to give you comfort, not to derail us. Even people with Accounting and Finance degrees weren’t taught this stuff in school, so don’t sweat it. Think of this article as your proverbial sweat towel. I want to save you from the same confusion and nervousness I faced on that first day of my career, starting with health insurance plans and their accompanying savings accounts.
Choosing the Right Plan
Joining the HSA vs. FSA debate starts with choosing the right health insurance plan. There are several options available that are typically differentiated by their deductibles. A deductible is just fancy word for the amount of money that you have to pay out-of-pocket for medical expenses before your insurance company joins the party.
For example, if you receive a medical bill for $6,000, and your deductible is $2,000, you will be responsible for paying that $2,000 out-of-pocket before your insurance company covers the remaining $4,000.
Having a lower deductible means you’ll have lower out-of-pocket costs once your medical bill arrives, since your insurance company takes on more of the responsibility. Having a higher deductible means you’ll have higher out-of-pocket costs for medical bills, since your insurance company takes on less responsibility. If you think the choice here is super straightforward, keep reading.
Consider the Costs
Sounds like there’s a catch…because there is. Plans that tout lower deductibles typically cost more per month and have limited options when it comes to pre-tax savings accounts. Let’s take a look:
Low Deductible Plan - higher monthly cost, lower deductible, Flexible Spending Account (FSA) available
High Deductible Plan - lower monthly cost, higher deductible, Health Savings Account (HSA) or FSA available
This is where things get personal and a touch more involved.
If you’re a healthy, 22-year-old who visits the doctor maybe once per year for a routine check up, you’re probably going to want to opt for a high deductible plan. Why? It’s all about playing the odds, my friend.
Paying your insurance premium each month is essentially paying for “what-ifs.” A high deductible plan costs you less each month because your insurance company is going to help you out a lot less when a big medical bill arrives. The low deductible plan is just the opposite - it costs much more each month because your insurance company is going to help you out a lot more.
If you’re a relatively healthy, young individual on a high-deductible plan, that once-a-year doctor’s visit likely won’t cost you anything if you stay within your insurance network (…but our healthcare system is really confusing, so that’s why I emphasize the word “likely.”) Your deductible will become much more relevant if you encounter a non-routine medical event or if you unwittingly visit an out-of-network doctor (oof).
All that to say, if you’re pretty healthy, don’t partake in a lot of dangerous activities on the daily, and keep your doctors visits “in network,” you’d likely pay less in the long run for a high deductible plan even if you end up having to pay your entire deductible in a single year.
Let me paint this little health insurance picture for you using real numbers from my own experience:
My high deductible insurance plan costs me $41 per month (low deductible costs $101.50 per month)
My annual deductible is $3,600 (low deductible is $1,400 annually)
I’ve been on the same heath insurance plan for the last 7 years
In 2020, I unexpectedly needed knee surgery. My bills totaled $5,492.20, including surgery and physical therapy. I paid $3,600 out of pocket to meet my deductible, and because portions of my physical therapy weren’t covered by my insurance provider, I paid an additional $357.39 for uncovered medical related expenses.
TAKEAWAY: While I paid noticeably more in 2020 thanks to knee surgery that required me to meet my annual deductible, I still paid less over the 7 year period by being on the high deductible plan versus the low deductible plan.
The case for the low deductible option: If you have a chronic illness, a dangerous profession or hobby, or are the caretaker of someone with a disability, for example, then the low deductible plan may prove to be less costly, despite paying more for insurance each month. Since your deductible resets annually, the math may support you paying higher monthly expenses to avoid paying thousands in deductibles every year if you or your dependent(s) incur routine medical bills.
Consider the Benefits
Now that we understand the monthly costs associated with different insurance plans and the potential impact of their annual deductibles, let’s dive into the different health related savings accounts offered.
Depending on which health plan you choose, there are two primary ways to save your pre-tax dollars for future health-related expenses:
Flexible Spending Account (FSA)
Health Savings Account (HSA)
What are these accounts even for? I’m glad you asked. These accounts hold pre-tax dollars that are meant to be used on any future health related expenses. Because the money you contribute gets to be excluded from your total taxable income, the government gets to stipulate where those dollars get spent. If you slip up and use the funds to pay for unqualified expenses, you’ll get hit with a 20% penalty on the rogue purchases. Yikes!
FSA users, it’s super important that you understand what those qualified expenditures are since you’ll likely have to use the account often to avoid losing any unused funds. I’m getting a little ahead of myself, though. Let’s compare the two side-by-side:
To no one’s surprise, the names of these accounts are confusing, because the FSA is actually less flexible than an HSA and both are technically health savings accounts. <eyeroll> But I digress…
I think it’s important to emphasize that an HSA is only available to those who are on a high deductible health plan. Why? Since those who opt for a high deductible plan will end up paying much more in the event of an unforeseen medical event, it makes sense that they would be provided with a pretty decent option to save for the unexpected. I suppose someone was feeling generous when this was instated. Who’s to say?
This high level comparison is already pretty telling, but let’s get into the nitty gritty to see if the risk of paying a higher deductible is truly worth it.
Tax Savings
While these accounts seem really similar on the surface, one is clearly more advantageous from a tax-savings perspective. Let’s look at a quick calc to bring this to life.
Assume your effective tax rate is 30%, you’re single, and you plan to contribute the maximum allowable amount to whatever account you end up choosing ($2850 for FSA or $3650 for HSA.) Your tax savings per year from each account would be:
FSA Tax Savings = $570*
HSA Tax Savings = $730*
You’re saving around $240 more in taxes annually by choosing to use an HSA over an FSA, and you’re given much more flexibility when in comes to spending the contributed funds.
*You can check my math using this calculator that does the complicated tax calculations for you.
Flexibility
I’ve teased this a couple of times, so you’ve probably already figured out that the HSA wins in this category, too. However, 2022 is an interesting time for me to be writing this article, since FSA holders were recently granted several concessions on the heels of the pandemic. Since we can’t count on these unique circumstances in future years, we’re going to look at both accounts during “precedented times.”
Healthcare FSAs typically have a “use it or lose it” structure. If you don’t use all the money in your account on eligible, health-related expenses by the end of the year, you forfeit it. (No bueno) Your employer does have two opportunities to prove they’re decent human beings, though. They can either (a) grant you a 2.5 month grace period to use up excess funds from the prior year or (b) allow you to rollover up to $570 to be used in the following year. Your employer has the option to choose one or the other, and if they choose not to opt into either, you’re S.O.L.
HSAs, on the other hand, allow you to continuously rollover unused funds year after year without any employer elections necessary, making it a true long-term savings account. Once you hit a certain dollar threshold in your account, you also have the option to invest your HSA dollars for even more growth potential.
Note: There are more nuanced ways to contribute to both an HSA and a limited FSA that allow you to spend the funds on specific dental and vision expenses, dependent health care expenses, etc., but we’re looking at the more basic Healthcare FSAs and HSAs in this article.
Employer Benefits
Some employers can choose to contribute a set amount of money to your HSA account each pay period, in addition to your annual salary! In my case, I’d be throwing away $52 per month in free money from my employer if I opted to use an FSA instead of an HSA. Since you only have the option to contribute to an HSA on the high deductible plan, that means I’d be paying more in insurance premiums annually and sacrificing $624 a year in employer contributions if I elected to use the low or middle deductible options available to me.
Over the last 7 years my employer has contributed roughly $4,000 to my HSA. If we think about those contributions in relation to my unexpected knee surgery, that means that my employer essentially paid for all of my out-of-pocket costs since I used my HSA to pay my deductible and uncovered treatment. Those employer contributions made a really big impact over time!
Sadly, employers aren’t allowed to contribute to an employee’s FSA.
Who ya got?
If I haven’t made it abundantly clear, I’m team HSA. The high deductible health plan is is the most optimal option for my age, medical needs, and desired monthly spending, and the tax savings benefits, flexibility, and additional employer funds sweeten the deal. Healthcare is one of those things that is entirely unique, though. I despised math in school, so I hate being told to “crunch the numbers,” but there’s just no way around it in order to make a truly informed decision — so crunch the numbers!
Regardless of which health-related savings account you have, I think we can all agree that using either is better than using neither, and having options starts by choosing the right health insurance plan.
Extra Takeaways
If you’re about to start your first job, request a comprehensive list of benefits that includes the different health insurance plans available to you. You’re typically given 2 weeks to a month to make those initial elections after you start, so it doesn’t hurt to do a little pre-work.
If you’re not on a high deductible health plan and you think it may be a good fit, take stock of your health and pull together your medical spending from the past few years. Unless you have a crystal ball, you’re going to need to use real information from the past to make an informed decision about your future.
If you’re on a High Deductible Health Plan and aren’t sure if you’re taking full advantage of your HSA’s tax benefits, contact your employer to figure out how to ensure your contributions (combined with your employer’s, if applicable) are hitting the maximum amount each year - $3,650 for 2022.
Research qualified health related expenditures! You’re only allowed to spend the funds in your FSA or HSA on those types of expenses. You can be hit with a 20% penalty if you spend the money on unqualified expenses. Spend wisely!
Want to maximize the benefits of both your rewards credit card and your HSA/FSA? Use the funds in your HSA or FSA to reimburse you for any medical related expenses that were charged to your personal card.
Don’t forget that your stashed away funds can be used for all health-related purchases that count toward your annual deductible, too!