Making Sense of Health Care Choices

November 2010

Everyone is aware of the high costs of health care. In fact, health care spending accounts for $2.3 trillion per year—or $7,681 per person—based on a recent government analysis. According to Pennsylvania Institute of Certified Public Accountants, there are some tax-advantaged options to help pay for medical or prescription costs.

Flexible Spending Accounts

Flexible spending accounts (FSAs) are offered by employers and can be used to cover medical expenses that are not paid by your health insurance. These might include deductibles, co-pays, or other costs. The employee contributes a portion of his or her salary to an FSA on a pre-tax basis, which means he or she does not pay tax on that money. The employee chooses how much to contribute each year, and it’s an important choice. Any unused funds at year-end will be lost. Keep in mind, effective Jan. 1, 2011, the cost of over-the-counter drugs will not qualify for reimbursement in a FSA, unless prescribed by a doctor. Certain medical products—such as saline solution, reading glasses, bandages, among others, will continue to qualify.

Health Savings Accounts

Employees do not lose the money they contribute to a health savings account (HSA), but the rules for qualifying are quite different. While anyone can contribute to an employer FSA, you can only participate in an HSA if you have an insurance plan with a high-deductible. That’s often the case among self-employed people, although some employers might offer a high-deductible plan. The definition of “high-deductible” can change each year. For example, in 2010 a plan deductible must be at least $1,200 for employee-only insurance and $2,400 for family coverage. There are also limits on the amount of pre-tax contributions that can be made to an HSA each year. In 2010, they are $3,050 for employee-only coverage and $6,150 for family coverage. You can use the funds in these accounts to pay for unreimbursed medical expenses and, in some cases, to pay for other health care coverage, such as COBRA health insurance payments. High-deductible plans often carry lower premiums, so you are essentially making a tradeoff: pay less money each month for insurance, but set aside some funds in an HSA in case you do face high medical expenses. An HSA may be provided by your employer or you might choose one offered by a bank or other financial institution.

Important Choices

It is important to understand what these accounts are before choosing one. Find out, for example, what fees are involved. Just as is the case with a checking account, you might encounter monthly fees or charges for every transaction, including transfers and overdrafts. The financial institution should be able to give you a schedule of fees so you can make comparisons among your options. Payment options may be another consideration. Most accounts provide you with a debit card or checks that you can use to pay for health-related costs, but some require you to file reimbursement forms, which can be inconvenient and cause slower payments. Some accounts allow you to invest your money in mutual funds or other investments, but most consumers maintain their funds in a savings or money market account. Of course, you’ll want to check the security of an online account and ensure that the privacy of your information is protected.

Your CPA Can Help

Health care expenses can take a big bite out of family budgets, so it’s important to understand your options for lowering those costs. If you want to learn more about these accounts—or about any other issues affecting your family’s finances—turn to your local CPA. He or she can offer the advice you need to make the best decisions on your finances.  Learn more at www.IneedaCPA.org.

The Money Management columns are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.

The Pennsylvania Institute of Certified Public Accountants is a professional association of more than 20,000 CPAs who work in public accounting, industry, government, and education. Founded in 1897, PICPA is the second-oldest state CPA organization in the United States. To find a member CPA in your area, visit our Web site at www.picpa.org and click on CPA Locator.  

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