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This Is How to Make the Most of Your Health Benefits

It's alphabet soup season—HDHPs, HSAs, FSAs and more. Here's what you need to know.

What's the difference between an FSA and an HSA? 

The answer I got from a millennial colleague was simply: What’s an FSA?1

With benefit open-enrollment season looming, corporate employees need a better answer than that to make the most out of their benefits. After all, with wages largely stagnant, benefits are the new salary.

Increasingly, employers are adding high-deductible health-care plans (HDHPs) to their lineup or making the plans their sole option2. The plans are often used in tandem with health savings accounts, or HSAs, which let workers use tax-free money for medical expenses. That helps bridge the deductible gap and lowers taxable income. 

Whether you choose a HDHP or have no choice but to join one, here's what you need to know about the plans and HSAs. 

How is a high-deductible plan different from a traditional plan? 

What's covered in the plans is largely the same—you still get many preventive-care visits for free. But in an HDHP, you pay lower upfront premiums than on a traditional plan in return for having a higher deductible. And when you're in one of these plans, you become eligible to open a health savings account (more on that later).

With premiums, how low is low? 

The average monthly premium for a single employee in a large employer's high-deductible, HSA-eligible health-care plan is $73, compared with $126 for a typical preferred provider organization, or PPO, plan, said Jay Savan, a partner at Mercer. For a family, the average monthly premium is around $303, compared with $441 for the PPO. 

And how high is a "high deductible"?

High-deductible health plans don't start sharing the costs with you until you've shelled out at least $1,300 for an individual or $2,600 for a family.

A recent study by the Kaiser Foundation and the Health Research & Educational Trust found that, for plans that have an annual deductible, the average amount for single coverage is $1,318. (That's the overall number across all different kinds of plans.) Single workers in large companies had an average of $1,105; singles in small businesses had an average annual deductible of $1,836.

For 2016, the IRS maximum for deductibles, co-pays, and other medical expenses that can come out of your pocket is $6,550 for individual coverage and $13,100 for family coverage. The Kaiser study notes that the dollar limits of out-of-pocket payments vary at a lot at companies. Again, looking at singles, it found a range from $1,500 to $6,000.

So what are health savings accounts? 

These are savings accounts you become eligible for once you are in a high-deductible plan. HSAs are much like flexible spending accounts (FSAs), which let you reimburse yourself for medical expenses—prescription co-pays, doctor's visits, and so on—out of untaxed money you've contributed to a special savings account3.

While the IRS limit for employee FSA contributions is $2,550 for 2016, single employees can save $3,350 in an HSA, and families can save $6,750. Anyone 55 and older can contribute another $1,000 a year. Rather than the FSA money you've saved being "use it or lose it" within a year, unused HSA money rolls over to the next year. HSAs are also portable. But if you leave a company and have unused FSA money, you have limited options for tapping that money. 

People refer to HSAs as "triple tax-exempt." What are they talking about?

The fact that HSAs are triple tax-exempt is a big financial deal. The money you put into an HSA isn't taxed; any interest or earnings on it grows tax-free; and you can withdraw it tax-free to pay for qualified medical expenses. That is a rare tax-exempt trifecta.

Tap it for something that isn't a medical expense, though, and you'll pay a 20 percent penalty, as well as income tax. Once you're 65, you can tap it for nonmedical expenses without penalty—you'll just pay income tax. You don't have to take a required minimum distribution at any certain age, like you do with IRAs.

Do employers contribute anything to HSAs? 

Companies often kick in something, but whatever it and you contribute can't top those IRS limits—$3,350 for an individual and $6,750 for a family. 

An analysis by HelloWallet of 400,000 HSA accounts administered by UMB Bank, a big HSA administrator, found that in 2013, 65 percent of those with HSAs got a contribution from their employer. The median amount was $700, and the mean was $1,400.

A 2014 Mercer study of benefits at large employers found median employer contributions of $500 for singles and $1,000 for a family. There's a nascent trend in companies paying HSA contributions as a match to employee contributions, said Savan, as many companies do for 401(k)s.4 

How do I open an HSA? 

Your company may have a relationship with a financial services firm and offer access to an HSA savings account through that provider. You don't have to stick with the HSA option your employer offers. Many financial service providers, including banks, insurers and mutual fund companies5, would love for you to plunk your HSA money with them. Many offer services similar to what you may already have used with a flexible spending account, such as a debit card. Shop around, and be sure to ask for a list of all possible account and investment fees. The investment options offered by various companies vary widely, although most HSA users keep money in cash-like accounts. 

Who should open an HSA?

The plans are an obvious good fit for healthy young people with good cash flow, and for people who make enough to want to whittle down taxable income. HDHPs may work well for young, healthy workers, because if you don't have much in the way of health care costs, a lower premium's great and that high deductible doesn't really matter—unless a big unexpected big medical expense pops up. Then you'd need the cash flow to cover it out of pocket without doing something such as raiding your 401(k).

Mercer's Savan plans to have his teenage daughters open HSAs when they graduate from college. He'll suggest they contribute at least the $50 monthly savings that he cites between current HDHP and PPO premiums, or $600 a year. Then, he said, he will tell them not to tap the money for 30 years. That's because of what he calls "the untold, or not-told-enough, secret of HSAs." If that monthly $50 goes into a well-diversified mutual fund and has earnings that compound into a big number, he said, each of his daughters can eventually repay herself for all her medical expenses with a tax-free distribution from her HSA. 

Just how realistic it is to expect someone to keep medical receipts for 30 years, in case the IRS wants to see them, is another thing. But Savan hasn't touched his HSA for 11 years. He views it as retirement savings.

Who should avoid high-deductible plans? 

People who think they could face an expensive medical procedure over the next year; have chronic health problems that require lots of regular prescriptions; and whose cash flow would make it a struggle to meet a high deductible. 

Can I have an HSA and a FSA? 

Sort of. You may be able to use an HSA for medical expenses and an HSA-eligible, or "limited use"  flexible spending account for vision and dental costs. Savan said that among large plan sponsors that offer access to health savings accounts, 51 percent also offer limited-purpose FSAs. He used his to pay for one of his daughter's braces; some people use it to get Lasik.

If I leave my company, what happens with my HSA? 

The account and the money are all yours, and they travel with you to your next job, or into retirement. 

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  1. 1 The answer: An FSA, or flexible spending account, is a pot of pretax dollars you can have deducted from your salary and you can tap to reimburse yourself for outlays on prescriptions and doctor's visit co-pays. It lets you get more mileage out of your money and lowers your taxable income.
  2. 2 Data from Mercer's 2014 annual survey of employer-sponsored health plans show that among plan sponsors with more than 500 employees, about 29 percent of participants enroll in high-deductible, HSA-eligible health plans when they're offered. That's up from 20 percent in 2012.
  3. 3 This article focuses primarily on corporate employees, who may be able to have money deducted from paychecks to go into HSAs. If you're self-employed and contribute to an HSA, you deduct the amount from your income taxes. 
  4. 4 That's an argument for using an HSA administrator that your employer has a relationship with, rather than going to an outside vendor, since a company isn't going to match contributions made to an outside account. 
  5. 5 Vanguard Group doesn't offer its own low-cost funds in an HSA, but its web site notes that one company, Health Savings Administrators, offers 22 Vanguard funds.