November 30, 2020

Open season for health care lasts from early November to mid-December for most federal workers each year.

Photo by Bermix Studio on Unsplash

Among the options for paying eligible health care expenses, you can plan to pay by using either a Flexible Spending Account (FSA) or by using a Health Savings Account (HSA). Both use pre-tax dollars to pay for medical expenses and thus save you and your family money, but they differ in several significant ways.

Flexible Spending Accounts

The Flexible Spending Account (FSA) was created by the Revenue Act of 1978, and FSAs allow employees to set aside pre-tax funds for eligible health care expenses that are not reimbursed by your FEHB medical, dental, or vision care plan. The use of pre-tax money means that you can save 20% to 30% or more, depending on your family’s federal, state, and FICA (Federal Insurance Contributions Act - otherwise known as Social Security and Medicare) taxes.

Technically, there are several versions of FSAs. Those related to health insurance expenses including dental and vision are called “Health Care Flexible Spending Accounts,” noted above. Then there is the “Limited Expense Health Care Flexible Spending Account” or “LEX HCFSA,” which is limited to dental and vision care only, and the “Dependent Care Flexible Spending Account” for dependent day care and other associated costs. (Click here for a comprehensive calculator for both the health care spending account and dependent care flexible spending account.)

The minimum amount needed to enroll in an FSA is just $100.

But there is one big drawback – you have to spend most of the pre-tax savings amount in your FSA within the same tax year, which is usually by March 15th of the following year for the previous year’s expenses. You can only carry over a certain amount each year, which is $550 as of this writing. Additionally, you have to sign up for the FSA each year to participate. FSAs thus require a significant amount of planning each year.

FSA account holders can roll over up to $550 a year to the following year.

Health Savings Accounts

With a Health Savings Account (HSA), created in 2003 as part of the Medicare Prescription Drug Act, you get to keep the money that you don’t use in one year and roll it over to the next, and keep adding to it. You can also invest your money held in the HSA much like you can in the Thrift Savings Plan (but in private investment accounts via the HSA) to build greater wealth over the years.

To open an HSA, you also must enroll in a High Deductible Health Plan (HDHP)*. It is essentially the same type of health plan as all the others offered in the Federal Employees Health Benefits Program (FEHBP), it just requires a higher minimum deductible of $1,400 for individuals and $2,800 for families, and higher out-of-pocket maximum amounts of $7,000 for individuals and $14,000 for families (for 2021). Some maximum amounts are lower, however, depending on the plan you chose. In general, the higher the deductible, the lower the premiums, so just by signing up for one you save money with lower premiums.

In addition to the lower premiums for health coverage, many insurance companies pay a monthly cash stipend to the associated Health Savings Account to pay for eligible medical expenses via the HSA. Aetna contributes $66.67 a month for self-only plans (totaling $800 a year) and $133.34 a month for family plans ($1600 a year). GEHA contributes $75 and $150 a month in its HDHP/HSA.

On top of the amount contributed by the insurance companies, individuals can contribute additional amounts up to IRS limits. As of this writing, for 2021 those limits are $3,600 for individual coverage and $7,200 for family coverage - and like IRAs and the TSP, these amounts increase from time to time as inflation increases over the years. Those account holders between the ages of 55 and 65 can contribute up to an additional $1,000 as catch-up contributions each year too. These contributions are tax-deductible, which saves you even more money each year.

HSA account holders can carryover and continue to invest each year’s contribution tax-free.

HDHP/HSA holders can use these funds for eligible expenses like the FSA above. Or, they can pay out-of-pocket for expenses and leave the funds in the Health Savings Account for future use or to devote to long-term investing. Any amount left over at the end of the year can be kept for future growth, as noted above.

How can the insurance companies offer both lower premiums and extra contributions? By taking more responsibility for basic health needs and expenses, individuals with HDHPs and HSAs use fewer resources, and therefore they are cheaper to insure. The insurance companies thus pass this savings on to those with HDHPs and HSAs.

Perhaps more importantly, those insured by HDHPs have “skin in the game” – since they are using more of their own money, they shop around for better services and better prices. They ask questions. They are directly involved in their own healthcare decisions. All of this contributes to driving down healthcare prices. It takes planning and preparation for expected and unexpected expenses, but in my opinion the effort is well worth the additional cushion HDHP/HSA owners can build after several years of participation in such plans. (It is also a significant part of Strategy V in TSP Investing Strategies.)

So if you haven’t done so already, definitely check out Health Savings Accounts associated with High Deductible Health Plans. It could be worth your while in the long run!

*Those enrolled in Medicare or Tricare are not eligible to enroll in an HDHP/HSA.

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