Powerful Tools For Managing Out-Of-Pocket Health Care Expenses
For many Americans, the hardest part of navigating the health care system is paying for the out-of-pocket expenses that accompany illness or injury. These costs are often a surprise, and may vary widely over the span of treatment. There are several tools available to help Americans save for out-of-pocket medical expenses, and to take advantage of the tax breaks created for this purpose. Here's a short overview of the most important ones.
Health Savings Account (HSA). This is a savings account designed to partner with an employer's high-deductible health insurance policy. An employer may contribute funds to this account as a part of your benefits. You can contribute a specific amount from every paycheck to this account before taxes. When you have medical bills to pay, you can pay your portion from this account. Funds in this account can roll over from year to year. You'll have to stop making contributions if you change jobs, but the account balance will still be available to you for qualified health care expenses.
Flexible Savings Account (FSA). This is another savings account that allows you to save pre-tax money from your paycheck towards out-of-pocket health care expenses and dependent care expenses. The FSA isn't tied to any particular insurance policy, which means that you can create and use one even if you get health insurance coverage from a traditional (not high-deductible) policy. An employer doesn't contribute to this type of account, and only $500 of the balance can roll over at the end of the year--the rest will disappear. Plan your FSA contributions carefully to avoid losing money by having too high a balance at the end of the year. This online calculator can help you plan your FSA contribution and estimate the tax advantages of using a FSA.
Health Reimbursement Account (HRA). These accounts are funded solely by the employer, who specifies which expenses and services the money may be used to cover. Because employer contributions are limited to a specific yearly amount, almost all of these accounts violate the Affordable Care Act (ACA) 's requirement that insurance plans not limit benefits; as a result, they have almost vanished from the market. If the unlimited-benefit provision of the ACA is revised or repealed, these accounts may reappear.
Tax Credits. For those whose health insurance is not provided by their employer, federal tax credits are available to subsidize out-of-pocket health care expenses. The ACA provides these credits based on income, so that people with less money receive more assistance. The recently-proposed American Health Care Act eliminates income-based tax credit and replaces it with one based on age, providing more assistance to older Americans.
All of these tools make it easier to meet unexpected medical expenses and to cover the ongoing costs of managing chronic illness. They do this in two ways: by creating a way to set aside funds on a regular basis against future costs, and by using pre-tax funds, which offset your medical bills by decreasing the amount you'll pay in taxes.
They also encourage you to think about your health as a part of your financial plan. How much money do you currently spend to stay healthy? Would you rather have that money available for other items in your budget? What kinds of changes in your lifestyle might help you reduce your health care costs? Many health problems are caused by unwise habits, not germs or injury. It may be easier for you to consider eating better, exercising more, or quitting smoking when you can see how much money it would save.
Our health care system is complicated, and stressful to navigate. When you use these tools to manage your health care spending, you are not only making your financial life easier, you're buying yourself some well-earned peace of mind.