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October 22, 2009
Health Savings Accounts Are Better Than Flexible Spending Accounts
Not long ago, Flexible Spending Account were all the rage. They allowed you to set aside pre-tax dollars from your payroll check and place it into an account which you could use to pay for medical expenses. Unfortunately, these accounts have many drawbacks and they are no longer as appealing as they once were.
Today, Health Savings Accounts have replaced Flexible Spending Accounts as the preferred pre-tax dollar savings vehicle for healthcare spending. There are many more advantages to Health Savings Accounts which are more appealing to individuals and families.
The main benefit of the flexible spending account is that you can put up to $4,000 dollars per year into the account. That’s un-taxable money which lowers your tax liability come April 15. Technically, there is no federal limit on the amount you can place into the account, but it is usually capped at $4,000.
Lawmakers in Washington are fighting over what to do with these accounts. The ability to be able to place pre-tax money into them makes them one of the most popular depositories for money that is used for medical expenses. Any ‘messing’ with this benefit will smell of a tax increase on the middle class.
On the other hand, there is one reason that you should get out of your flexible spending account if you have one: you use your money by the end of the calendar year or lose it.
Enter the Health Savings Account. This account is also pre-tax contributable and you can also contribute to it on a post-tax basis too. You do not give up your money in a calendar year, either. You keep it and it keeps accumulating in your Health Savings Account with interest until you use it.
Under the flexible spending accounts rules and guidelines, you are asked to provide receipts and proof of purchase for every little charge made on the account. It is watched like a hawk. Health Savings Accounts still have the restriction of only being used for medical expenses, but there are no hawks looking over your shoulder. Should you become the target of an IRS audit, however, you will need to provide receipts for all of your purchases for the year in question.
It is time for the flexible spending account to die slowly. And it would on its own as long as those who are still using them can get a better deal elsewhere – which is possible with a Health Savings Account.
The advent of Health Savings Accounts has been a bright spot in the health care arena for several years now, even in spite of the annual limits that one must adhere to when placing money into the account. Those who do have a better chance of being able to pay for unexpected medical events that occur in their lives. And that is peace of mind that is hard to come by right now.
Posted by Wiley Long at October 22, 2009 09:13 AM