There are two primary types of tax advantaged accounts allowed by the IRS – Health Savings Account (HSA) or a Flexible Spending Account (FSA). While similarly named, there are significant differences in how these plans operate. Each year the IRS determines the limits of how much can be set aside on a pre-tax in these accounts. They also publish the list of eligible expenses for reimbursement. At Intercept, all of these plans are managed and administered for us by Health Equity/Wage Works.
Flexible Spending Accounts
Flexible Spending Accounts are famously “use it or lose it” accounts in which at Open Enrollment you determine your expected out-of-pocket expenses in the coming year and set aside earnings into a pre-tax account designed to pay those expenses. Eligible expenses can include copays and coinsurance due to providers, medical supplies, as well as certain over the counter products, as determined by the IRS. If you do not use all of the money you set aside, any funds left over after the plan year are lost. So it’s important to plan carefully!
FSAs have three types – a Health Care FSA, a Dependent Care FSA, and a Limited Purpose FSA.
A Health Care FSA (HC FSA) is designed to provide coverage for you and your covered family members for health related items, including things like dental and vision care.
A Dependent Care FSA (DC FSA) is unique piece of IRS regulation that allows you to put aside $5,000 for reimbursement expenses related to child up to age 13 (or an adult dependent incapable of self-care) daycare or related expenses which permit you to work.
A Limited Purpose FSA (LP FSA) works in concert with a Health Savings Account. If you have a Health Savings Account, you can elect an LP FSA to help reimburse the costs of dental and vision care. Medical expenses are expressly not covered in an LP FSA, and all other FSA related rules – such as the use-it or lose-it rule – apply to an LP FSA.
Health Savings Accounts
In a HSA plan, a bank account is opened in your name. This account will stay with you and can follow you even if you leave the company. You make pre-tax contributions to your HSA bank account, and can invest your savings. An HSA is like a 401(k) that you can use for medical expenses in retirement. Your money is contributed tax-free, earnings on investments are tax-free, and withdrawals for qualified medical expense are tax-free. It is the only triple tax advantaged account the IRS allows!
There are some important things to know about HSAs. The first is that they can only be offered in conjunction with a “High Deductible Health Plan” (HDHP, also called a Consumer Directed Health Plan or CDHP). This means you have a greater obligation before the plan pays any benefit (but you can use your HSA dollars to cover costs). Additionally, prescription drugs are integrated into the deductible – so you would be responsible for the full cost of your medications until you reach your deductible. Finally, recipients of certain government programs such as Medicare or Tricare are not eligible to open an HSA. But, if you are a smart consumer of healthcare and leverage the tools available to you, an HDHP with an HSA could be a smart choice.
