Insurance can be confusing enough, but with a Health Savings Account (HSA) or a Flexible Spending Account (FSA) it can be even more confusing. While most people enrolled in eligible programs are doing so for tax reasons, many aren’t getting the most out of the benefits they’re paying for.
A recent study says 77% of people made mistakes when signing up for their benefits, and that nearly half of them admitted those mistakes cost them money.
Are you currently enrolled in either an HSA or FSA? If not, you might be losing money. These programs are designed to cover medical and dental expenses you would normally pay for out-of-pocket, and they provide great tax benefits, too.
In fact, accountants suggest the tax benefits are often overlooked and most people could take advantage of them.
Here’s The Skinny
Before we dive into what you can and cannot do with these benefits, let’s first review the basics and how these two programs work and their differences.
HEALTH SAVINGS ACCOUNT – HSA
Health Savings Accounts are programs that allow users to transfer funds into a medical savings account as part of a high-deductible health plan. The funds you contribute work sort of like a medical IRA, which build up as you save for retirement. These programs benefit both the employer and the employee, reducing the tax liability for both. Please note, funds withdrawn for non-medical expenses will be subject to a penalty tax.
An HSA is:
- Not subject to federal income tax
- Has no deadline for withdrawal
- Out-of-pocket limits include: deductibles, coinsurance, medication, and copays, but not premiums.
- Self-reimbursement can occur at any time, meaning you can pay expenses out-of-pocket to let your HSA grow, tax-free, and then pay yourself back later.
FLEXIBLE SPENDING ACCOUNT – FSA
Flexible spending accounts are another great option for those looking to reduce their tax liability.
For an FSA, money is taken incrementally throughout the year and can be applied to many areas in which insurance doesn’t normally cover, as well as normal medical and dental care.
Employers like the benefits of an FSA because they are able to subtract it from their payroll tax liabilities. But beware, with great reward, comes greater risk.
- Used most often for medical and dental expenses that are not paid for by your insurance, including co-pays, deductibles, medications, bandages, and many other costs that you would have paid for anyway.
- Most FSA accounts, but not all, are specific to the plan year only. Expenses must occur during that calendar year and remaining balances are returned to the employer.
- To get the most out of your FSA, use your funds at the end of the plan year to cover important medical, dental, and vision care. This is the time to get braces, cleanings, new glasses, and stock up on important medical supplies. Just remember to keep your receipts!
Setting aside tax-free money to cover dental costs you would normally pay-out-of-pocket for anyway is not only smart, but can actually cut your costs by as much as 40%. Your routine items such as co-pays and medications now help reduce your tax liability, but this benefit comes with a big drawback: Use it or lose it, which costs Americans about 14% of the money they invest into FSA’s every year.
Don’t Lose it– Use it!
Make sure the dental and health costs are covered under your specific plan and only pay for what your out-of-pocket expenses would be. For example, if you visit the office to repair a cracked filling and the bill was $300. After applying benefits, we might find the actual out-of-pocket expense is $72.00, which will be paid at the time of visit.
NOTE: It’s important you keep documentation and receipts for your expenses, as the insurance company may ask for records to demonstrate those expense were legitimate and within the service period covered.
Procedures that are purely cosmetic (such as teeth whitening or porcelain veneers) usually aren’t covered. However, those that improve dental health usually are, such as crowns, bonds, or dentures.
There are many other dental services you can take advantage of to maximize the use of your flexible spending account, too.
If you pay into it, you might as well max out their benefits. The end of the year will be here before you know it so get a head start and contact us today to make those end-of-year appointments!
~Dr. Marea White