Written By: Jesse Ketterman, Jr, University of Maryland Extension, Maria Pippidis, University of Delaware Cooperative Extension

The beginning of the New Year always leads to thoughts about wellness.  For some people it is financial wellness while others think about physical wellness.  Flexible spending accounts, health savings accounts, and health reimbursement accounts can be a tool that helps bridge the gap between physical wellness and financial wellness.

How is that possible you ask?  According to the 2018 Report on Economic Well-Being of U.S. Households by the Federal Reserve System, one out of four adults skipped medical care due to cost and one in five adults had major, unexpected medical bills to pay.  The bottom line is that many people don’t plan for medical expenses.  This article shares some financial tools that are available to assist with covering the costs of medical care.

A flexible spending account is a tax-advantaged tool that can help you save for health and dependent care expenses such as medical costs, childcare, and other health services. Tax-advantaged means the money goes into the account prior to taxes being taken out. This means you save money on taxes and have money set aside for eligible healthcare and dependent care expenses. Each plan year you would need to re-enroll in your FSA. Be aware that funds generally must be used by the end of the plan year, and therefore any money left over is forfeited.  For 2020, you can contributed up to $2,750 toward a healthcare FSA.

A Health Savings Account (HSA) is a medical savings account available to you if you have a HSA-qualified, high-deductible health insurance plan (HDHP). The best way to figure if your plan qualifies is to ask your benefits office or insurance provider. If the plan is HDHP, you are able to open a HSA. This account allows you to save pre-tax dollars for qualified medical expenses. This provides the same tax reduction benefits as Health FSAs. Contributions can be made by you and/or your employer, but you are the account owner. Funds do carry over from year to year and can be transferred to your spouse’s HSA. Any funds that would transfer to another beneficiary would be taxable.  For 2020, you can contribute up to $3,550 for an individual contribution and $7,100 for a family contribution.

FSAs and HSAs put your pre-tax dollars to work. Why is this important? Pre-tax dollars means that the money is set aside before taxes (Federal, FICA, and State) are taken out of your paycheck. Setting money aside in this way, before taxes, has two benefits: (1). Setting this money aside before taxes lowers your end-of-year tax bill because it lowers your taxable income. Therefore, when taxes are calculated it based on the lower income amount. (2). Because the money is going into the account before taxes are taken from it, you get to keep the amount that would have been taken for taxes.

A health reimbursement account is similar to the HSA expect it is owned by the employer.  It can be used toward qualified medical expenses and may role over from year to year. If the employee leaves the company or loses their job, the funds remain with the employer.

Setting aside money for medical expenses should be a part of a financial plan in the same way you set aside money for your car insurance and car repairs.  A solid financial plan and using your health insurance can reduce stress and promote health.  Let FSAs, HSAs, and HRAs work for you and help bridge the gap between financial wellness and physical wellness.

For more information about health insurance literacy visit our website at https://extension.umd.edu/insure/consumer-resources.

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