Benefits: Choosing a health spending plan

Open enrollment is just around the corner, said Ann Carrns in NYTimes.com, so now’s the time to choose among your employer’s “alphabet soup of health spending plans.” It’s crucial, first of all, to understand the difference between flexible-spending accounts, known as FSAs, and health savings accounts, or HSAs. FSAs, which have been around for decades, “let you set aside money for medical expenses on a pretax basis, which lowers your taxable income.” But if you don’t spend the money by the end of the year, “you forfeit the balance.” The funds in an HSA, on the other hand, “get rolled over into the next year,” and you keep the account even if you change jobs.

Expect HSAs to become more common, said Sarah O’Brien in CNBC.com. They’ve become an important complement to high-deductible plans known as “consumer-directed health plans,” which already figure prominently in the insurance offerings of U.S. employers. In fact, an estimated 22 percent of firms are planning to offer only such plans next year, up from 19 percent this year. To be eligible for an HSA in 2014, you have to be enrolled in a health-insurance plan with a deductible of at least $1,250 for self-coverage, or $2,500 for family coverage. Despite those high out-of-pocket costs, some financial advisers recommend HSAs over FSAs because they “build a war chest” for future medical needs and “require less guesswork.” HSAs also have higher maximum contribution ceilings than FSAs do. Some companies also offer health reimbursement arrangements, or HRAs. Workers can tap into HRAs to pay for qualified medical expenses, but the funds are owned by the employer, which earns a tax break for setting them aside. More and more companies “view such accounts as a way to mitigate their rising health-care costs.”

If your employer offers an HSA, go for it, said Hadley Malcolm in USA Today. Flexible spending accounts, despite the name, just aren’t as flexible. “Even if you don’t usually have medical expenses throughout the year that you think you’ll need HSA funds for, the account can be used strictly as a way to build up savings and reduce your taxable income.” Just don’t abuse it. The money must be used only for qualified medical expenses; otherwise you’ll face a 20 percent penalty. While an HSA “will only let you use what is actually in your account,” FSAs “will let you spend up to your designated amount for the year even if the money hasn’t been deducted from your paycheck.” Your provider will require you to substantiate expenses, so it’s important to “keep good records.”

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