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Health Spending Accounts: A Complement to Regular Health Insurance

Consumers—and insurers, too—are always on the lookout for ways to save money on health plans. Health spending accounts (HSAs) were developed with this goal in mind, and they offer a number of unique opportunities.

Two examples of HSAs include flexible spending accounts (FSA) and medical savings accounts (MSA). Under both types, you can put away money for healthcare and health-related purchases, and you also are given flexibility as to how to spend it.

Individual plans specify exactly what will be covered. Generally, HSAs can be used to pay for the following:

In some cases, the account will cover other expenses, such as changes made to your home because of a disability. And some plans can be used to pay for childcare and the care of adults who are your dependents. For a complete list of services covered, check with your individual plan.

Flexible Spending Accounts

How They Work

FSAs may be offered by your employer in addition to your regular health plan. They are also known as cafeteria plans because, just as if you were selecting food from a cafeteria line, they offer you a variety of coverage options.

When you enroll in an FSA, you need to select your healthcare options for the following year during an open enrollment season at the end of the previous year. At that time, you stipulate the amount of money you want deducted from your paycheck every month (before taxes are taken out) and placed into your flexible spending account, which goes toward paying your medical bills during the year.

You choose this amount by predicting the cost of any medical services or products you expect to accumulate over the year, including the cost of things like prescription medicines and therapy. Again, you do not pay taxes on these deductions, and that is where the savings come in. But, it is a use-it-or-lose-it deal. If you do not use all the money, you may forfeit any money that cannot be not rolled over from year to year.

An advantage of FSAs is that you can spend up to the total amount you will be investing for the year (in the form of monthly deductions from your paycheck) before you have actually invested it all.

Caution Points

You need to plan well and stay organized to benefit from a FSA. First of all, you will need to have good records of what you have spent on healthcare over the years so you can make an accurate estimate of how much you will spend over the following year. This is the amount you will be deducting from your paycheck—with no hopes of seeing it again for purposes other than your healthcare. And you cannot change the amount of your monthly deduction until the next open enrollment period, even if you discover you have estimated the wrong amount.

Furthermore, you need to keep track of everything you spend on health services and products and submit all your receipts. The total of these receipts will then be subtracted from your FSA and reimbursed to you. Under some types of flexible spending accounts, you are given a debit card for the account so that you do not have to lay out additional cash, but this still requires you to keep records and remember to use it.

Medical Savings Accounts

How They Work

As with an FSA, you (or your employer) contribute to your medical savings account and the contributions are tax-deductible.

Unlike FSAs, however, the unused money does roll over from year to year, and it also earns interest. Interest rates are usually set by the insurer who maintains the account for the employer or individual.

The earnings may go to your employer if your company sponsors the plan, but these accounts may also be available privately if you are self-employed.

You may only be eligible for an MSA if you also have a high deductible health plan—ie, one which requires you to pay out a relatively high amount each year before it picks up the bulk of the cost. The reason behind this requirement is that high-deductible plans usually have low co-pays for office visits and cheaper monthly premiums (payments). This amounts to added savings on top of what you save by investing the money tax-free.

Caution Points

MSAs save you money as long as you stay well for a long time after signing up for them and assuming you spend wisely for any care you do need along the way. With this in mind, these accounts do generally include information on living a healthy life and purchasing care wisely.

But if anything goes wrong, it could be devastating, especially for anyone who is low-income. One injury or illness can not only wipe out the account, but can cost thousands of additional dollars before you satisfy your out-of -pocket maximum, or what you will be responsible for paying overall in deductibles, co-pays, and other expenses before your insurance plan picks up the rest.

If you use any of your unused MSA money for reasons other than health expenses, you have to pay taxes on it and a penalty is added.

In the end, with good planning and a little luck, an MSA can put you ahead. But think things out carefully, and consider your risk of becoming sick or injured before you enroll.


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Aetna. Health care FSA. Aetna website. Available at: Accessed February 18, 2016.

HSA qualified expense list. HSA for America website. Available at: Accessed February 18, 2016.

Publication 969—introductory materia. Internal Revenue Service website. Available at: Accessed February 18, 2016.

Reed ME, Graetz I, et al. In consumer-directed health plans, a majority of patients were unaware of free or low-cost preventive care. Health Aff (Millwood). 2012;31(12):2641-2648.

Robinson JC. Health savings accounts—the ownership society in healthcare. N Engl J Med. 2005;352:1199-1202.

Last reviewed February 2016 by Michael Woods, MD  Last Updated: 5/6/2014