Saving Money with FSAs and HSAs
Welcome to Saving Money with Andrew! If you’re new, you might want to check out my top 9 money-saving tips.
As the designated “handler of paperwork” in our family, I’m responsible each year for making our employee benefit elections, which include choosing health insurance and other benefits. The stakes are pretty high because, like many Americans, our healthcare and dependent care expenses each year are significant.
Choosing health insurance is an extremely broad topic, so instead I’m going to focus more narrowly on three great money-saving opportunities that come up at benefit election time - Healthcare Flexible Spending Accounts (healthcare FSAs), Dependent Care Flexible Spending Accounts (dependent care FSAs), and Health Savings Accounts (HSAs). Most people will only be eligible for one or two, but they are incredible ways to save up to a couple of thousand dollars per year in taxes just for filling out some forms (FSAs) or earn a large tax deduction for saving money for future healthcare expenses (HSAs).
Healthcare FSA
An estimated 35 million Americans have a healthcare FSA. Essentially, these are accounts you can fund via paycheck deduction (a portion of your paycheck each pay period goes into the account). Then, you can use the account to cover eligible medical expenses your insurance doesn’t cover, such as copays and out of network doctor bills. Most commonly, you submit receipts to the company that manages the FSA. In some cases, the FSA manager will send you a debit card that you can use for eligible expenses.
The huge benefit here is that contributions to your FSA are not included in your taxable income, so if you contribute the maximum for 2021 ($2750 per person, $5500 for a couple), you’ll save a significant amount in taxes, as much as 30-40% or more of your contribution in many cases, which can easily exceed $1000 for a couple. The downside is that these accounts are “use it or lose it” - with small exceptions you must use the contents of the account within one year. So, make sure to deposit only amounts you think you’ll use, based on your out-of-pocket healthcare costs in recent years. In prior years when we used a healthcare FSA, we had no problem meeting the maximum, but that may not be the case for everyone.
Dependent Care FSA
Dependent care FSAs are much like healthcare FSAs, just for eligible expenses for children, such as daycare, babysitting and before and after school programs. For 2021, a married couple can contribute up to $5000 for use for childcare and other expenses. Every year, we submit our first $5000 in childcare expenses (unfortunately, this doesn’t take too long!) and the paycheck deduction provides a substantial tax benefit because the $5000 contributed to our dependent care FSA reduces our taxable income by that same amount.
Health Savings Accounts (HSAs)
HSAs are a bit more complicated - they are available only for Americans with high-deductible health plans (HDHPs), which only one-fourth of employers currently offer. The downside of HDHPs is that participants must reach a substantial deductible before receiving any insurance reimbursement (for 2021, $1400 for an individual and $2800 for a couple/family).
There are, however, two major benefits of HDHP’s:
These plans are typically lower cost than other insurance.
HDHP participants are usually eligible to contribute to an HSA.
HSA’s are like healthcare FSAs,[1] but even better for a few reasons:
The contribution limits are much higher ($3600 per year for an individual, $7200 for a couple)
HSA funds need not be spent within one year, but can instead accumulate indefinitely. Thus, in many ways they are like other tax-preferred savings vehicles like IRAs, 401(k)’s, and my favorite, the 529 account. We use our HSA as another long-term savings vehicle, and just figure we’ll eventually use the funds for a large healthcare expense.
In many cases, employers will often match HSA contributions up to a limit. This is essentially free money.
And now…Andrew’s pick of the week!
I recently discovered the YouTube account of Live from Here, hosted by the great mandolinist Chris Thile. The account features a number of extraordinary live performances. A few of my favorites:
Can't Find My Way Home (Blind Faith) - Rachael Price
Blue Skies - Andrew Bird & Chris Thile
A Nervous Tic Motion of the Head to the Left - Andrew Bird
I hope this has been helpful. If you liked it, please share it with a friend! Also, please send me your feedback, requests, and success stories.
[1] One generally cannot have both an HSA and a healthcare FSA. But, you can have an HSA and a dependent care FSA.