HSA vs. "Flexible Spending Account" (State of NC emps))

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

HSA vs. "Flexible Spending Account" (State of NC emps))

Postby tidalwave10 » Sat Jul 27, 2013 9:10 am

I've never had an HSA. But now in my 40's, it seems like a good time to investigate for tax savings. From what I understand, an HSA operates like a 401(k) or IRA, where you put money into it pre-tax. Then withdraw / reimburse your account for qualifying medical expenses.

As a State of NC employee, I have something available to me that sounds remotely like an HSA--colleagues enrolled in it call it s Flexible Spending Account. The money is taken out of each paycheck pre-tax. And then you pay qualified medical expenses with it. However:

1) There seems to be no investment component. Guess the money just sits there rather than earning interest, dividends, etc.

2) You must somehow magically calculate your future out-of-pocket medical expenses perfectly each enrollment period. Then use up all the funds in the account by either Dec 31st--or now possibly by March with recent changes--or lose the money. Who it goes to I haven't the slightest idea.

If I understand correctly what an HSA offers, that seems far superior to what the State of NC offers. But I'm reluctant to sign up for something where if I miscalculate future out of pocket medical expenses, I lose what's left in the account each year--versus allowing the money to roll-over each year like an HSA.

Can any current State of NC employees advise on what to do? I'm hoping that the State offering the "FSA", rather than an HSA, doesn't disqualify me from enrolling in an HSA.

Or maybe I've got it all wrong and the two things are somewhat mutually exclusive from a tax sheltering perspective. Maybe funds that go into an HSA aren't pre-tax at all, but rather more like a Roth?
tidalwave10
 
Posts: 520
Joined: Sun Jul 29, 2012 2:48 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby FNK » Sat Jul 27, 2013 9:33 am

This is very common among employers in all states. The catch is that to have an HSA you have to have a huge deductible on your health insurance. The tax savings are still worth it, even if you overshoot a little.

Read:
http://www.bogleheads.org/wiki/Flexible ... ment_-_FSA
http://www.bogleheads.org/wiki/Health_Savings_Account
User avatar
FNK
 
Posts: 1357
Joined: Tue May 17, 2011 8:01 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Meaty » Sat Jul 27, 2013 9:36 am

Not all HSA accounts lose their money each year. I have one through Wells Fargo; it accumulates the balance forever (never lose it) and it has an investment component after the balance hits 2k. It even offers index funds as options.

I'd look for a similar product over what you've described.
Meaty
 
Posts: 217
Joined: Mon Jul 22, 2013 8:35 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Geologist » Sat Jul 27, 2013 10:07 am

It is not the FSA that would disqualify you from having a HSA, but your standard medical insurance.

Whether a HSA is better depends. As FNK mentions, to have a HSA you must have medical insurance with a deductible larger than that in most "regular" health insurance. This means, of course, that the health insurance covers much less of your medical expenses. It is possible that the State of NC only offers its standard health insurance and not an optional HSA plan.

Thus, you could have a HSA only if you gave up employer-paid health insurance and bought a separate policy on your own. This would almost surely be a worse financial deal (keep in mind that the State of NC has probably also negotiated good cost rates from cooperating hospitals/physician networks that you probably wouldn't have access to with separate insurance).

A weakness of high-deductible insurance plans is if you run into a medical problem that requires considerable expenses over multiple years. This can even be a problem with standard health insurance. Several years ago, a colleague and her husband had medical problems over multiple years that not only required the deductible but exceeded the annual stop-loss maximum that families had to pay under our plan (this meant they had out-of-pocket expenses of more than $3500/yr for several years in a row). Many families would have trouble paying in this scenario. With a HSA, the deductible alone could lead to a scenario like this.

A flexible spending account (FSA) allows you to cover allowable expenses with pretax money with your current health insurance. For many people, it is a good deal. It does require reasonable estimation of your expenses, and thus works best for predictable issues (prescriptions, procedures that are scheduled even if not every year). It is wrong to think you have to exactly match the expenses you claim because the tax savings reduce the breakeven below what you actually have withheld. For an account that covers a year (and then can be adjusted), investment is not really an issue.
Geologist
 
Posts: 309
Joined: Fri Jan 02, 2009 8:35 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby tidalwave10 » Sat Jul 27, 2013 10:25 am

Thanks to all. Sounds like an HSA is not an option for me at this time. Don't want to give up my current health insurance. The State plan is reasonably priced if you don't add family members to it. Both my wife and I work for the State and so both have health insurance separately through the State. Believe it's $20-$30/mo. per person (and had a zero dollar employee premium a few years back) for an 80/20 plan. Add a spouse or a kid and it skyrockets to $400+/month.

Afraid to think what Cobra might cost if I ever needed it. Lots of older folks working for the State must make the real cost per employee very high, regardless of the negotiating power the State has. Looking up the Cobra cost may be telling.

Perhaps I should consider starting an FSA at something reasonably small like $500/yr and adjust higher or lower going forward. Hate the idea of leaving money on the table.

@Geologist, good point made about tax savings and break-even point.

@FNK, thanks for posting the Wiki links. Will check them out.
tidalwave10
 
Posts: 520
Joined: Sun Jul 29, 2012 2:48 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby papiper » Sat Jul 27, 2013 10:35 am

As others have said, an FSA is NOT an HSA. If you can only have one, an FSA is fine. You get pretax savings but could lose anything left over.

The advantages of an HSA are pretty dramatic if you and your family are in good health. You have to agree to a much higher deductible, but your premiums go way down also. People "Don't like it" that you have to pay 100% of the negotiated medical bills until you reach a stop loss - $5000 family for me. After that it picks up all costs.

The numbers make the case very appealing.

In my case I can put $6490 in the HSA every year - it all comes out of my salary pretax, so that saves a couple of grand right there. My monthly insurance payment went down also -

Save $720/year in premiums
Get $960 year company paid to HSA (tax free)
If I save another $6490 in pretax dollars to HSA that results in about $1500 tax savings

After the 1st $1000 in the HSA, I can invest - choices include vanguard index funds

The catch is you have to use it for medical expenses to stay tax sheltered. But you can wait as long as you want and carry over year over year and the income is tax sheltered also. The advantage going in looks like an IRA, the advantages coming out are like a ROTH IRA.

Qualifying expenses include medical insurance premiums later - so I'm stacking up the account now for later and paying medical from cash flow as I go. My medical family expense this year without surprises will be about $1200 - and I've got over $18,000 in the HSA and growing.
User avatar
papiper
 
Posts: 42
Joined: Tue May 28, 2013 11:36 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Geologist » Sat Jul 27, 2013 10:41 am

I think I would add up covered costs for the previous year before picking a figure to contribute to the FSA. I know very well about the tax savings, but I try to keep my FSA total below my highly likely eligible expenses, so I'm similar to you.

One thing to keep in mind is that out-of-pocket costs for eyeglasses are FSA-eligible. This can be a way to use up FSA balances at the end of the year at your option.
Geologist
 
Posts: 309
Joined: Fri Jan 02, 2009 8:35 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Meaty » Sat Jul 27, 2013 3:33 pm

papiper wrote:As others have said, an FSA is NOT an HSA. If you can only have one, an FSA is fine. You get pretax savings but could lose anything left over.

The advantages of an HSA are pretty dramatic if you and your family are in good health. You have to agree to a much higher deductible, but your premiums go way down also. People "Don't like it" that you have to pay 100% of the negotiated medical bills until you reach a stop loss - $5000 family for me. After that it picks up all costs.

The numbers make the case very appealing.

In my case I can put $6490 in the HSA every year - it all comes out of my salary pretax, so that saves a couple of grand right there. My monthly insurance payment went down also -

Save $720/year in premiums
Get $960 year company paid to HSA (tax free)
If I save another $6490 in pretax dollars to HSA that results in about $1500 tax savings

After the 1st $1000 in the HSA, I can invest - choices include vanguard index funds

The catch is you have to use it for medical expenses to stay tax sheltered. But you can wait as long as you want and carry over year over year and the income is tax sheltered also. The advantage going in looks like an IRA, the advantages coming out are like a ROTH IRA.

Qualifying expenses include medical insurance premiums later - so I'm stacking up the account now for later and paying medical from cash flow as I go. My medical family expense this year without surprises will be about $1200 - and I've got over $18,000 in the HSA and growing.


Plus, most high deductible plans are PPOs rather than HMOs which enabled the insured to immediately see a specialist rather than having to go through a "gate keeper physician". I could literally go straight to the Mayo clinic if I so chose; to me that's a huge comfort if I or my family gets really sick
Meaty
 
Posts: 217
Joined: Mon Jul 22, 2013 8:35 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby tidalwave10 » Mon Jul 29, 2013 3:37 pm

Thanks again to all.
tidalwave10
 
Posts: 520
Joined: Sun Jul 29, 2012 2:48 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby tidalwave10 » Wed Sep 11, 2013 5:21 pm

Low and behold, new for our Oct 2014 "Open Enrollment", the State of NC Health Plan is now offering a "Consumer-Directed Health Plan (CDHP). Consisting of a high deductible health plan and what they call a Health Reimbursement Account (HRA). Might *this* now be considered an HSA?

Probably will stick with my 80/20 BCBSNC plan until I learn more about the new offering. The scant literature on the new option does say that money left in the account at the end of the year "will remain in your account for the following year..."
tidalwave10
 
Posts: 520
Joined: Sun Jul 29, 2012 2:48 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby HouseStark » Wed Sep 11, 2013 5:48 pm

An FSA is not an HSA, as was explained earlier, and an HRA is also not an HSA. These are different things. If the so-called high deductible insurance plan does not meet the specific requirements of a High Deductible Health Care Plan (HDHCP), as stipulated in the regs, it does not make you as a participant eligible to make contributions to an HSA. I think it likely that any plan which meets those requirements will have that characteristic specifically stated in its description, since that's one of the key features that would make someone pick it.
HouseStark
 
Posts: 324
Joined: Mon Oct 15, 2012 3:31 pm
Location: Minneapolis, MN

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby grabiner » Wed Sep 11, 2013 8:36 pm

tidalwave10 wrote:Low and behold, new for our Oct 2014 "Open Enrollment", the State of NC Health Plan is now offering a "Consumer-Directed Health Plan (CDHP). Consisting of a high deductible health plan and what they call a Health Reimbursement Account (HRA). Might *this* now be considered an HSA?


An HRA is not an HSA either, although it has some of the same advantages if you have stable employment. Usually, the way that an HRA works is that the balance is maintained by the plan, increased annually. You can use the balance to pay your medical costs, and any money left over remains in the account (without interest). If you change health plans or leave the employer, any unused HRA balance is forfeited.

The federal government's high-deductible plans offer the option of an HRA or HSA. The plan contributes the same amount to either one; if you are ineligible for an HSA for some reason, the contribution goes to an HRA. The HSA option is better if you are eligible, because the federal government offers many different plans; if you switch to a different government plan, you lose anything in the HRA, but you continue to own the HSA for your own use.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 13381
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby tidalwave10 » Sat Sep 21, 2013 9:15 am

Thanks for the replies. Think I'll stay with my 80/20 plan for now.
tidalwave10
 
Posts: 520
Joined: Sun Jul 29, 2012 2:48 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Bob's not my name » Sat Sep 21, 2013 9:30 am

tidalwave10 wrote:1) Guess the money just sits there rather than earning interest.

2) You must somehow magically calculate your future out-of-pocket medical expenses perfectly each enrollment period. Then use up all the funds in the account by either Dec 31st--or now possibly by March with recent changes--or lose the money.
Both of these concerns about an FSA are unfounded. You contribute from paychecks throughout the year, so there's no money "just sitting there" unless your medical expenses all occur on New Year's Eve. For many FSA users it works the other way -- their spending outpaces their contributions, so they're getting a free short-term loan.

It has already been pointed out above that you can save money with an FSA even if you forfeit some funds. A mathematical explanation and discussion of a possible modification to the use-it-or-lose-it rule are here: viewtopic.php?f=10&t=101267
Bob's not my name
 
Posts: 6975
Joined: Sun Nov 15, 2009 10:24 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby wander » Sat Sep 21, 2013 4:46 pm

papiper wrote:... In my case I can put $6490 in the HSA every year - it all comes out of my salary pretax, so that saves a couple of grand right there. My monthly insurance payment went down also -

Do you mean $6450?
User avatar
wander
 
Posts: 1526
Joined: Sat Oct 04, 2008 10:10 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby tidalwave10 » Sat Oct 19, 2013 7:57 am

Bob's not my name wrote:
tidalwave10 wrote:1) Guess the money just sits there rather than earning interest.

2) You must somehow magically calculate your future out-of-pocket medical expenses perfectly each enrollment period. Then use up all the funds in the account by either Dec 31st--or now possibly by March with recent changes--or lose the money.
Both of these concerns about an FSA are unfounded. You contribute from paychecks throughout the year, so there's no money "just sitting there" unless your medical expenses all occur on New Year's Eve. For many FSA users it works the other way -- their spending outpaces their contributions, so they're getting a free short-term loan.

It has already been pointed out above that you can save money with an FSA even if you forfeit some funds. A mathematical explanation and discussion of a possible modification to the use-it-or-lose-it rule are here: viewtopic.php?f=10&t=101267


Thanks, not-Bob. Will have to reconsider participating in the FSA.
tidalwave10
 
Posts: 520
Joined: Sun Jul 29, 2012 2:48 pm

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby 1210sda » Sat Oct 19, 2013 9:35 am

papiper wrote:
The catch is you have to use it for medical expenses to stay tax sheltered. But you can wait as long as you want and carry over year over year and the income is tax sheltered also. The advantage going in looks like an IRA, the advantages coming out are like a ROTH IRA.


Am I correct in thinking that once you reach age 65, you can use the money in your HSA for any purpose??

If so, would those withdrawals also be "Roth like", in that you wouldn't pay taxes on them

1210
User avatar
1210sda
 
Posts: 790
Joined: Wed Feb 28, 2007 9:31 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Bob's not my name » Sat Oct 19, 2013 9:45 am

Possibly, but not necessarily. The wiki has a thorough explanation: http://www.bogleheads.org/wiki/Health_savings_account
Bob's not my name
 
Posts: 6975
Joined: Sun Nov 15, 2009 10:24 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby wander » Sat Oct 19, 2013 11:00 am

1210sda wrote:Am I correct in thinking that once you reach age 65, you can use the money in your HSA for any purpose??

If I remember correctly, at 65, you can withdraw HSA money as traditional IRA meaning you will pay tax as ordinary income.
User avatar
wander
 
Posts: 1526
Joined: Sat Oct 04, 2008 10:10 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Bob's not my name » Sat Oct 19, 2013 11:18 am

Bob's not my name wrote:Possibly, but not necessarily. The wiki has a thorough explanation: http://www.bogleheads.org/wiki/Health_savings_account
Bob's not my name
 
Posts: 6975
Joined: Sun Nov 15, 2009 10:24 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby 1210sda » Sat Oct 19, 2013 12:07 pm

Thanks Not Bob...here's what the wiki says:

Withdrawals for other purposes are taxed at your full tax rate, with an extra 20% penalty. The penalty is waived if you are at least 65 or disabled, and if you die and do not leave the account to a spouse, the account is distributed with tax but with no penalty.

1210
User avatar
1210sda
 
Posts: 790
Joined: Wed Feb 28, 2007 9:31 am

Re: HSA vs. "Flexible Spending Account" (State of NC emps))

Postby Bob's not my name » Sat Oct 19, 2013 1:18 pm

And the wiki also wrote:Once you have retired, you can withdraw from the HSA an amount equal to your past medical expenses plus any current expenses tax-free, and withdraw from your other accounts for non-medical expenses. HSAs can be used to pay medicare premiums and other medical expenses in retirement.
A traditional IRA doesn't work exactly the same way. You can withdraw from a TIRA penalty-free at any age to pay for medical expenses to the extent they exceed 10% of your AGI. I wrote about this in an article last year on tfb:
The medical expenses exception would allow a penalty-free and effectively tax-free withdrawal even if your tax rate is not 0%, since expenses over 10% of adjusted gross income are deductible. That is, if your AGI is $100,000 and you have a $20,000 medical emergency, the first $10,000 is paid from taxable funds and the next $10,000 can be paid with a traditional IRA withdrawal, penalty-free and tax-free. I simplified the math here. Note that this rule requires the taxpayer to perform some algebra, since there is a looping effect: the traditional IRA withdrawal adds to your AGI. So the correct math is: $10,909 is paid from taxable funds and the remaining $9,091 is paid with a traditional IRA withdrawal.
So a HSA withdrawal is possibly but not necessarily like a TIRA withdrawal.
Bob's not my name
 
Posts: 6975
Joined: Sun Nov 15, 2009 10:24 am


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: Bing [Bot], DonCamillo, Google [Bot], meowcat, Professor Emeritus, sari, Yahoo [Bot] and 69 guests