Uncle Sam (the US government) has created a bunch of health spending accounts that are meant to do two things: (1) confuse you and (2) save you money on your health-related bills. We'll try to help you with both by showing you just two of the many different types of plans.
Many employers offer "flexible spending accounts" as a job benefit. After reading this, you'll know how to use a flex account to help you save money on your medical bills.
On your first day, your HR rep will ask you how much you'd like to put in your flex account. Let's assume you say, "$1,000." Your employer will gradually take money out of your paycheck until $1,000 comes out over the course of the year.
The money goes directly from your salary into this account, cutting out the middleman: Uncle Sam. That is to say, you pay no taxes on it. It's tax evasion without the jail time.
Say you have a medical expense, like a prescription to fill. You have to pay some portion of the bill. You can use the money in your flex account to pay for this.
Normally you would have paid for it out of your pocket from your post-tax salary. Now your flex account pays for it, and you get more bang for your buck. A flex account is like a discount sticker because you are using money that has never been taxed.
Depending on your employer and plan, you may need to submit paperwork to your HR representative to get reimbursed from your flex account.
A flex account is great, so what's the catch? Well, like a spouse, if you don't use it, you lose it. If you don't spend your $1,000 by the end of the year, it runs off with your best friend and sends you postcards from Tahiti.
That said, you should ask your HR representative exactly what medical expenses you can pay for using your flex account. Then figure out how much money you spend on contact lenses, glasses, or doctor visits over a year. Contribute only the amount you think you'll spend.
Health Savings Account (HSA)
If you're young and healthy, you may want to consider getting a high deductible health insurance plan that allows you to create a special account called an HSA (Health Savings Account).
In short, an HSA is a special checking account that helps you save money on your health-related bills.
To get one, you'll need to take these steps.
Step one: get a health insurance plan that is "HSA-compatible." Typically, an HSA is only available with "high-deductible plans."
Step two: search online for banks that offer HSA accounts. This checking account doesn't have to be affiliated with your insurance company.
Step three: deposit money into your HSA account.
You can put up to maximum of roughly $3,000 (for an individual) in your checking account. If you contribute more money than you spend in a year, your money stays in your account for the next year. (You don't lose it like you would with a flex account.)
Now you get to spend your money. Use checks or your debit card to spend money from your account on a large range of allowable medical expenses (including some that your insurance doesn't even cover). The list includes co-pays, prescription and over-the-counter drugs (like allergy medication), dental and vision care, and much more. In most cases, you can't use your account to pay for monthly premium payments.
Now let's discuss the savings. You indirectly save 10% to 35% on the medical expenses used with your HSA.
Why? In April, when you file your taxes, you'll be able to take a deduction (we talk about this exciting word in our taxes topic) for the money you deposit into your HSA. This benefit could save you hundreds of dollars every year.
Pros and Cons
You can have this account with any health insurance (even low deductible plans).
If you don't use your money by the end of the year, you lose it. Also, this plan must be offered by your employer.
If you don't use your money by the end of the year, you get to keep it in your account for future use.
You have to have an "HSA-compatible" plan (high-deductible).
To save money on his medical bills, Bert signed up for a flex account and chose to deposit $2,500 into his account over the course of the year.
When December rolled around, he realized that he'd only spent $2 out of his flex account and needed to spend $2,498 by the end of the month or he'd lose the money.
So he ended up having all kinds of unnecessary medical procedures performed: fish gills implanted in his neck (for when he falls asleep in the bathtub), electrodes placed in his head that allow him to change TV channels by blinking his eyes, a cup holder scooped out of his thigh, and altered taste buds so that everything tastes like bacon.
Unfortunately, the insurance company wasn't amused by his "personal upgrade" and declined to authorize most of his expenses -- a tough pill to swallow for Bert, even if it did taste like bacon.