It’s that time of year to sign up for health benefits. If you are one of the lucky ones with benefits at your company, do a happy dance. And, if you’re offered an HSA and/or an FSA option, get ready to feel good about saving some money!!
Having a tax background, I was drawn to the benefits these accounts offered. However, after speaking to a number of people, I’ve found that it’s not always well understood. Otherwise, everyone would be using them both (when possible).
Picking health insurance depends on many things like your age, health, family or single, upcoming surgeries, estimated doctor visits, medications, and more. When working at a company that offers health benefits, you generally will pay for some portion of your health insurance pre-tax. That’s a big plus.
Let’s assume you’re married and doing pretty well, so you’re in a tax bracket at 22%. I’m going to assume that you’re contributing around $600 for your family’s health insurance each month. One survey I found said the average monthly policy for 2020 was just over $1,150. So, make sure to thank your company for chipping in the difference ($550).
For those of you who don’t like math, I’m sorry. But, you should LOVE calculating how much money you’re saving. Here we go. If you pay $600 per month and bypass payroll taxes which are pushing 8% and your FEDERAL tax bracket of 22%, you literally save over $250/mo on taxes. In a year, that means a savings of over $3,000. Yes, $3,000!! Here’s how it’s done:
Earnings $851 Calculated amount needed if taxed to cover $600/mo Less: Taxes -$251 =$851 * 30% per above === $600 Amount need for monthly Health Insurance premium
Ok, that’s a lot of numbers, for sure. This calc is low unless you’re in one of those wonderful states that have no STATE income tax (which there are only 7 states currently). If you followed me this far, I hope you’ll follow me through an FSA and an HSA as well.
We did the above example because it shows how pre-tax payments are very beneficial to the financial health of you and your family. See what I did there? Financial health helps you when paying for your health insurance.
Ok, so what about the FSA and HSA? Put simply, health insurance doesn’t cover everything, right? You have deductibles, co-pays, co-insurance rates, and more. The average deductible amount in 2020, from the same survey from above, supposedly averages almost $8,450.
So what happens if you have to pay for something not covered by insurance? You have the same issue…..TAXES. It’s more expensive to pay for any of your medical bills with after-tax money. In our example, you have to earn $851 in order to pay $600 worth of medical insurance. Wouldn’t it be nice to use pre-tax money again? I’m glad you asked because this is where the FSA and HSA come in.
The FSA, also known as a flexible spending account, gives you the opportunity to put aside some of your paycheck to pay for healthcare expenses each year. The money is put into a separate account. When you pay for a medical expense, you ask the account to reimburse you. It covers a lot of items from over-the-counter medicine like Tylenol to glasses, doctor visits, surgeries, and many other items. In 2022, you can contribute $2,850 PRE-TAX. Here’s the catch, you have to use it for expenses in 2022. Yep, the same year. So, you have to estimate how much you’ll spend.
I know that almost all of us buy some form of over-the-counter medicine (these are medicines that don’t need a prescription from a doctor). The rules change, but you’ll get the idea from a basic list below:
- Headache medicine like Tylenol
- First aid stuff like Bandaids
- Cold and flu products like DayQuil and NyQuil
- Heartburn medication like Mylanta
- Allergy medication like Claritin
- Sunscreen like Banana Boat… I “like” a lot of things when I save money
Ok, that won’t be a ton of money, but it adds up. If you can also use it for out-of-pocket payments not covered by your insurance, it adds up. That’s your deductible money. How about some of these items, that aren’t “health” insurance items:
- Eyeglasses (from around $150 -$1,000)
- Eye exam (from around $5 – $250)
- Contacts (who knows?)
- Chiropractor (from around $35 – $105, but it could be many visits)
- Dental treatments ($50 visit to expensive gold fillings which can go to $4,500)
Ok, so there is a wide variety of things going on. The key is to know what you spend yearly and then estimate it to contribute to your FSA. If you overestimate by just a bit, think of the over-the-counter items and “fillers”, and you can use them to clean out any over-estimated amounts not used. Make sure to talk to your company about how it’s handled. But, if you decided to max it out at $2,850 because you have to pay for braces (like Mak & G), you save over $1,200 in taxes. Yeah, baby!!! That’s better than a poke in the eye. Wouldn’t that be something fantastic? Please say “YES!!”.
I don’t want to scare you off with all the details, so I’m taking a high-level approach here. An HSA is a health savings account, almost exactly like an FSA. But, it requires you to have one thing an FSA doesn’t. While anybody at a company can do an FSA (and if you have child care, you can do one of those as well), an HSA requires that you have a special type of health insurance. The government wants people to have health insurance, and to bring the cost down, insurance companies created the high deductible health plan (HDHP).
These high deductible plans, which are put together by the insurance company cover less, and it will make you pay more for your health care if you need it. Since they push more risk to you, they charge less. Make sense? So, the government created a better way to pay for expenses when you have one of these HDHP plans. It’s called a Health Savings Account. It’s used to pay for health expenses not covered by insurance. In my research, the items that can be covered by both are virtually identical. The items covered continue to change (and get better). On January 1, 2020, they added over 20,000 new expenses which are eligible now and in the future.
Check out this video which will give you an overview of the HSA:
Since the deductible on an HDHP can be large, a family can put in $7,300 for 2022. If you max out the contribution, you’ll save over $3,100 in taxes if you use the 30% rate we’ve been using. WHOOOOHOOO!!! That’s a ton of cabbage. Plus, a real benefit is that it can be used for years to come, even if you no longer have an HDHP. Unlike an FSA, you won’t have to forecast your spending for the year and lose anything you don’t spend. That’s bad. So, in this case, you don’t have to worry. If you are worried about which insurance plans qualify, they usually label them really well. If not, ask the nice people who work in Human Resources at your company, because they’ll know.
The point is that you shouldn’t be afraid of saving money. These plans offer substantial tax savings. At a summary level:
- The FSA is for a year
- The HSA is for years to come for most people
- An FSA is for anyone, if the company offers it
- An HSA is for anyone if they have a high deductible health plan (HDHP)
And, they both cover lots of health expenses. It’s that simple. Now you just need to make sure you work it into your budget. If you know you’ll spend it, this is a no-brainer to help you save money.
It’s Fun Saving Amounts (FSA) of money from taxes 🙂