Saving Money with a Health Savings Account or Flexible Spending Account

Explore benefits and considerations for each savings account.

Saving Money with a Health Savings Account or Flexible Spending Account

Healthcare costs continue to rise. In fact, in 2021, the average individual market rates are expected to increase 0.01% in Connecticut and about 1% in New York. One way to save money on health care costs is to open and use a Health Savings Account (HSA) or a Flexible Spending Account (FSA). Both accounts have tax advantages, however most people don’t understand the benefits or how they work. To help you figure out if an HSA or FSA is the best medicine for your savings, Patriot Bank has detailed what you need to know.

Health Savings Account Benefits

An HSA allows you to set aside pre-tax dollars in an interest-bearing account to cover future medical expenses as long as you’re enrolled in a high-deductible health plan. You can deduct your contributions, and your earnings or interest will grow tax-deferred. Your distributions will be tax-free when they are used for qualified medical expenses, which include doctor visits and hospital stays as well as eyeglasses, contacts, chiropractic care, prescription drugs and other qualified medical expenses.

Another advantage of the HSA is that you can keep your account active even if you switch jobs, so you’ll always be able to contribute and distribute money. Plus, the money you put into your Health Savings Account rolls over year after year – so if you don’t spend the money, you don’t lose it. This can be especially beneficial for people who are relatively young and healthy as you can start saving up money for medical costs that you’ll incur later in life when that’s not the case. You can open an HSA either through your employer or through a financial institution like Patriot Bank.  

What Is a High Deductible Health Plan?

A High Deductible Health Plan (HDHP) offers lower-cost premiums and higher deductible vs a PPO or HMO. In exchange for this much lower rate, you will need to pay for your own medical expenses out of pocket or with the funds you set aside in your Health Savings Account until you reach your annual deductible. Once you reach your deductible, your health insurance will kick in, depending on what plan you choose.

Here’s an example of how this works:

  • HDHP Premium: $10 per pay period
  • PPO Premium: $200 per pay period

A good way to take advantage of an HDHP is to set aside the money you would have paid towards your premium to fund your HSA. For example, instead of paying the insurance company $200 each pay period, you pay $10 per pay period, and put $190 into your HSA each week. Then you can use your HSA funds to cover your doctor’s appointments, prescriptions, and other qualified medical expenses.  

HSA Eligibility Requirements

  • Must have a high-deductible health plan (HDHP)
  • Cannot be a dependent of another taxpayer
  • Cannot be enrolled in or eligible for Medicare or other health insurance
  • Must be younger than 65 

Learn more about Health Savings Accounts & High Deductible Health Plans from the IRS.

Flexible Spending Account Advantages

Contributions to a Flexible Spending Account also come from your gross pay as pre-tax money, just like an HSA, and your withdrawals likely won’t be taxed if used for qualifying medical expenses. Childcare expenses qualify, too, so you might be able to enjoy some additional tax benefits by using an FSA to pay for daycare, depending on what your accountant tells you.

One of the main differences with the FSA is that you must declare how much of your paycheck you want your employer to deduct and place into your account each pay period. And you must spend all your declared funds within that tax year; otherwise, the unused money will be lost in most cases unless your employer has set up a grace period or carryover option. That’s why it’s important to have a sense for how much you’re going to spend on childcare and what you’ll need for medical expenses throughout the year.

Also, there are contribution limits that the IRS sets each year. Check with your employer to find out your maximum allowable contribution. In 2021, the maximum amount one person can save in their FSA is $2,750. Check with the IRS to see the amount you can save if you are married filing jointly.

FSA Eligibility Requirements

There are a few different types of FSAs including Health FSAs, Limited Health FSAs and Dependent Care FSAs. The only eligibility requirement that is shared among all three is that you can’t be self-employed. If you are self-employed, check out the Medical Savings Account (MSA). The other requirement is that your employer needs to offer a Flexible Spending Account for you to enroll in. You don’t need to couple this with a High-Deductible Health Plan like an HSA. For full eligibility details and questions, check with the IRS, or your tax professional or HR representative.

As health care costs continue to rise, using a health savings account or flexible spending account can be a good injection into your savings. To see how much you could save on medical expenses, try using a FSA or HSA Calculator. Take a look at your financial situation and then talk to your employer or contact Patriot Bank in Southern Connecticut and New York to determine if an HSA or FSA can serve you and your family’s health care needs and savings goals.