Money Rehab with Nicole Lapin - Defining FSAs & HSAs and How To Make Them Work For You

Episode Date: November 11, 2024

Happy Open Enrollment, Money Rehabbers! When you pick your health insurance plan, you're likely going to encounter FSAs or HSAs. Today, Nicole explains the difference between the two— and how to get the most out of both of them.

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your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. b-o-f-a dot com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. It is open enrollment season, which means it's time to decide on your health insurance plan for 2025. If you get your health insurance through the government's marketplace, you need to sign up for your plan by December 15th. If you get your health insurance through your employer, your deadline is probably before that. When you do sign up for your plan, depending on how you

get your health insurance, you'll be given the option to sign up for an FSA or an HSA. And if you're like my friend Jason Pfeiffer, who's the editor-in-chief of Entrepreneur Magazine and also the co-host of one of my other podcasts, Help Wanted, the FSA HSA option drives him nuts. Here's a voice note that he sent me about this a few years ago. Nicole, I'm going to rant to you

and you can feel free to use this on the show if you think that it would make for a good episode subject or not, or just delete it. But I'm going to rant to you and you can feel free to use this on the show if you think that it would make for a good episode subject or not or just delete it but I'm going to rant to you anyway why am I supposed to use an HSA health savings account I my employer has these account offerings where I can put a certain amount of money in for health and for childcare and for transit. And they're like arbitrary random amounts of money, right? It's like $5,600 and something and some smaller amount and whatever it is. And so, so I got to deal with the small amount of money and then it doesn't roll over after a year. So I got to have, I have to use it during the year. And there's like one more account that I have to find. And then, and then every time I use it, it during the year. And there's like one more account that I have to find. And

then every time I use it, it's like incredibly burdensome because I have to hold onto these receipts and often upload them to this terrible website that was built in 1994. And they give me a debit card. Yes. But half the time they still need the receipt. So then I use the debit card. I have to think to use the debit card. So I have to carry around the debit card and then I use the debit card and then I still have to hold onto the receipt and then upload it two weeks later to this website from 1994. It makes absolutely no sense. And the thing that I can't understand is, am I actually saving enough money to make this unbelievably burdensome and stupid process worth it? So you tell me, should I continue to suffer through this or should I just say,

screw it? I hate this thing. I'm just going to pay all this stuff out of my own pocket. That's what I want to know. So Jason meant FSAs, not HSAs, but that is a perfect example of how confusing this topic can be. I've talked about these accounts before on the show, but today I really want to focus on telling you how to get the most out of these accounts. But first, let's do a quick refresher. FSAs and HSAs are accounts where you save pre-tax money to use on health care expenses. But health expenses is more generally defined than you might think. Most costs you incur at a hospital are eligible, of course, but a good amount of things that you might already have in your bathroom are also eligible. Things like first aid kits, sunscreen, allergy medicine, chapstick, and even those red light anti-aging face masks. Sephora actually has an entire section on their

site for FSA eligible items. Using pre-tax money for these purchases means you're getting an automatic discount before you even start hunting for sales. It's estimated that you can save around 30% on medical purchases through FSAs or HSAs. There's a certain limit of how much money you can contribute, of course, but that money is yours to use for the year on eligible health purchases. But beyond getting discounts on cold tea products, these accounts can also work hard for you and your money. Let's start by breaking down how FSAs and HSAs work, because one letter makes a really big difference.

Think about it this way. The FSA is like the friend zone account. It is there for a good time, but not a long time. Meanwhile, the HSA is your have and to hold account, built to stick around for the long haul. Okay, that might mean nothing to you right now, but it will all make sense very shortly. Let's start with FSAs.

FSAs, or flexible savings accounts, are like a healthcare credit card more than a regular savings account. FSAs are offered by employers, and while some might kick in a little extra funding, most sadly do not. With an FSA, a set amount of your pre-tax pay is earmarked for health expenses. But here's

the magic. You can get the entire year's set amount up front. So if you have a baby in January, you can cover the cost of the birth right away, even using part of your December's paycheck, interest-free, fronted by your employer. Since it's managed by your employer, FSAs might come with stricter rules, but there are some cool perks. If your doctor has ever recommended working out and you get a note about that, you might be able to cover your gym membership. And beyond some of the basics like Tylenol and Band-Aids, FSAs often cover some quirky items like a $400 Owlette baby monitor and a crib camera streamable to your phone. Obviously, I have a one-track mind. We're baby registry items right now. But rest assured, there are eligible items for adults too.

But an important heads up, if you don't use your FSA funds by the end of the year, they can vanish. This is where the around for a good time, not a long time thinking comes in. Luckily, most people set aside a reasonable amount and find it easy to use up on glasses, dental visits, or even that travel-size Pepto-Bismol that you pick up at the airport.

And if you have leftovers, hey, maybe this is your moment to get a $400 massage gun. Seriously. Some companies will allow employees to roll over some of their FSA balance into the next year. The IRS sets the annual rollover limit, which is $640 for 2024. But once the IRS sets the limit, it is really up to your employer to let you take it. So don't assume you'll be able to carry over your balance into 2025. You have to ask first. HSAs, or health savings accounts, on the other hand, are yours to keep forever. Unlike the employer-tied FSA, an HSA is connected to your health plan,

which means that you can get one even if you're self-employed. HSAs are always paired with high deductible health plans. But before we dig into that, let's double-click on premiums versus deductibles. Remember, a premium is the monthly cost you pay to your insurance company, and a deductible is what you pay out of pocket at the doctor. A large-scale study by a national insurance company found that many people are overpaying on premiums and under-saving for retirement, and there's often a direct relationship between the two. I get it, the thought of being out of pocket for a medical bill can be scary, but it's worth considering if a high-deductible, low-premium plan with an HSA might work for you.

The cool thing about HSAs is that they're like a tax haven that's accessible. A lot of tax havens are only accessible to the very rich, but HSAs are for everyone. This year, you can contribute up to $4,150 per person or $8,300 per family pre-tax. Like an FSA, you can use these funds for Band-Aids, hospital bills, even that red light mask thingy. But if you want to max out your HSA benefits, let that money grow by investing it because HSAs have this amazing ability to transform into an IRA-like account. More on that in just a sec, but first, how do you use your HSA to invest anyway? The way

to set this up when you sign up for a health insurance plan is to confirm that it's HSA eligible. Then see what HSA providers are compatible with your plan. I'd also ask the bank if they offer HSA options too. Some do. Once you fund the account, it kind of looks like a brokerage account or a retirement account. You can take the funds in that account and invest it in the market. Some HSAs will have offerings that help you choose investments, while others may only offer specific investments. If you're a newbie investor who wants some extra support, you might want to find an HSA provider that offers perks like robo-advising or automatic rebalancing. like robo-advising or automatic rebalancing. So when you're signing up for health insurance plans, don't just check if it's HSA eligible, but check which providers are supported.

For day-to-day costs, you could use your HSA for things like unexpected medical costs, like when I had that health scare last year and had to take an ambulance. Another, dare I say, fun part of an HSA is that there is no time limit on reimbursing yourself for medical expenses. So you can let your account grow over the years while still keeping it in your back pocket as an emergency fund or a fun fund. So let's say I had paid $2,000 for the ambulance bill out of pocket, which I did not. I negotiated, which is a whole other episode. And I kept the receipt. I could have the money in my HSA untouched, invested, and growing, and then sell some of those investments later on to reimburse myself,

and then use that tax-free reimbursement for fund money. Once you hit 65, HSAs evolve into something even more flexible. You can withdraw money tax-free from medical expenses, or treat yourself to something non-medical and just pay the income tax, much like a traditional IRA withdrawal. One last note, most people fund their accounts with pre-tax money, but it may actually be better in some cases to use post-tax dollars and take deductions on your contributions. But however you fund it, HSAs do offer a lot of ways to save and earn. For today's tip, you can take straight to the bank.

Do you have kids and are looking for another tax-advantaged account? Check out the Coverdell Education Savings Account. While contributions are limited to $2,000 a year, and these accounts do have some other restrictions, they can be used to pay for far more things than a traditional 529 educational savings account, including private school tuition, school supplies, and after-school care. They also have far more investment options than a more limited 529 account, making them potentially a better investment. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do.

So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.