NerdWallet's Smart Money Podcast - Open Enrollment and HSA vs. FSA

Episode Date: November 9, 2020

Picking health insurance is a pain, but the right choice can save you serious cash. Also, a health savings account can be a great option if you can handle a high deductible health insurance plan, but it’s not for everyone. A traditional plan with a flexible savings account could be a better fit. Want the Nerds to answer your money question? Email [e-mail] or call or text the NerdHotline at 901-730-6373. And visit www.nerdwallet.com/podcast for more info on this episode.

Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Liz Weston. And I'm Sean Piles. You know you have questions about how to manage your money. Well, we are here to help you answer them. Call or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. And please hit that subscribe button to get new episodes delivered to your devices every Monday. If you like what you hear, please leave us a review and tell your friends. Okay, we've got one more plug before we get into the episode. We want to know,

what has the pandemic taught you about money? How has the way you've handled your money changed in 2020? We're working on a special episode about all the money lessons we learned this year, but to make it happen, we need to hear from you. We've already received some really thoughtful and interesting responses, so please keep them coming. And since I'm an audio focused kind of guy, I'd love to actually hear as many of your 2020 money lessons as possible. That means leaving a voicemail on the Nerd Hotline or emailing us a voice memo.

This episode, we're doing a deep dive into HSAs and FSAs with the help of our tax nerd, Tina Oram. But first, in our This Week in Your Money segment, Sean and I discuss open enrollment, which is currently happening for a lot of people. That's right. We've entered that magical and maybe headache-inducing time of year where we make decisions about what kind of health insurance we want in the next year. And there's a lot to consider when you're making this decision. And actually, it's more than health insurance. It's all kinds of benefits if you happen to be employed by a company who offers benefits.

But also there's the Medicare deadline and the ACA deadline. So they all kind of come together right now. And that's one thing I wanted to lay out right off the bat is all these different deadlines here. So for marketplace plans like healthcare.gov and state exchanges and individual plans, you have from November 1st until December 15th to make your decisions. If you have employer sponsored healthcare like Liz and I do, days will vary. We had a couple of weeks to make our decisions and we actually just finished our enrollment period. And then for Medicare, you have from October 15th to December 7th. And for Medicaid, there actually is no restriction and you can apply at any time. And the Medicare one is when you typically are switching plans. If you want to do that,

you sign up initially within seven months of your 65th birthday. So either the three months before or the three months after. Make sure you understand all those deadlines because there can be like lifetime consequences if you miss your enrollment period. Or if you don't enroll for your health coverage, even with your employer, then you just won't have health insurance next year, which in the middle of a pandemic is not a great idea. Yes, definitely sign up, please. If you've got access to it, let's do it. So I want to talk about the process for choosing your health care plan and different things that people should consider. What do you think people should be aware of? Well, obviously, the first thing is do it. But don't necessarily just pick

the health insurance you had last year, because things are changing all the time. And that's true with everything, Medicare, with ACA, with everything. The deductibles might change, the networks might change, the drugs that are covered might change. So unfortunately, there's no shortcut to this. You actually have to look at the information and make a decision based on your circumstances. Right. This is the one time of year where it makes sense to sit down, spend a little bit of time digging through these numbers and thinking about what kind of coverage you might need for all of your various factors and getting the thing that's right for you. Because once you make your decision, this is going to affect the health coverage that you have all of next year. And also it's a good time to take a look at what your other benefits

might be. Again, if you have employer provided benefits, you might have a lot more than you know, like some companies are offering pet insurance and a lot of companies offer prepaid legal. And let me say that prepaid legal can come in really handy. It can help you write that will that you've been putting off and getting those healthcare documents that you need. And it's either low cost or free, which is great. There's also could be mental health support. There could be all kinds of little niceties that your company is paying money for. So you might as well take advantage of them. And telemedicine is a new one of those that I think a lot of companies have adopted, especially in the past year. And if that's something that you can make part of your benefits package, then I think people should really

dive into that and make sure they have that available for themselves. I was really pleased with our company's version of that because I was able to make, if not a same day, the next day appointment with the doctor. It didn't feel like there was a rush. I was able to talk to her about a bunch of different things and get some clarity on some things. And that was really nice. I really liked that. Well, I've heard from some friends who've done this as well, and they expressed something similar that they felt like they actually had more one-on-one attention having a telemedicine appointment versus having an appointment in an office where doctors are often rushed from one appointment to the next, which is kind of ironic. You think that

you wouldn't have as good of attention over the internet, but because you're in that one-on-one Zoom session with your doctor, it's a little bit more intimate. One thing I also wanted to talk about was people who've lost their health insurance this year because they've maybe been laid off in the pandemic. For the folks who are doing that, they're likely going to have to get directed to ACA plans through healthcare.gov. Again, I think it's really important for people who maybe even if they don't have the best options available to them to consider all of these different factors in terms of what coverage they might need, whether they can have their prescriptions covered so that they are getting the robust coverage that they need for themselves in 2021. And keep in mind that those ACA, also known as Obamacare, exchanges will offer you essentially

subsidized premiums. It's tax subsidized. So don't think that you have to pay the full freight like you do with a COBRA plan. That's the one that's usually extended after you lose your job. And no matter what, make sure you get that coverage because going bare is never a great idea. It only takes one accident or one illness like, you know, can happen in a pandemic as well as any other time to really saddle you with just life-altering bankrupting bills. So it's definitely worth having. Yeah. And unfortunately, given the very dysfunctional nature of our healthcare system, medical bills are often one of the leading reasons that people go into bankruptcy or even go into poverty. So doing what you can to make sure that you have

the coverage that you need. If you do get medical bills, have ones that are more affordable, can go a long way for keeping you more financially sound over the long run. And if you have any questions about your employer-provided benefits, your human resources department is a great option for getting those questions answered. We have this excellent article that's actually a step-by-step guide to choosing a health insurance plan. Shout out to Lacey Glover who wrote that. So if you are having a hard time figuring out all of the different factors that you need to consider and what might be the best option for you, and also wading through the alphabet soup that is all of these different healthcare options, check out that article. Liz will link to it on our show notes post. It's worth the read.

Absolutely. All right. And with that, I think we can get on to this episode's money question, which comes from Clement in Denver. They ask, which is better, an HSA or an FSA? OK, this one's going to be complicated. Yes. But fortunately, to help us answer Clement's question on this episode of the podcast, I'm going to throw a bunch of questions at Liz, who knows the stuff inside and out. And we're also going to have our go-to tax nerd, Tina Orem,

on to help us understand the tax implications of each option. So pleased to have Tina on. We haven't had her on before and I'm really excited. So hi, Tina. Hi there. Good to be here. Welcome to the show. It's so good to have you on. Well, to start, let's just first break down what an FSA and an HSA is and talk about some similarities and differences. Tina, can you lay that out for us? Sure. So generally speaking, an FSA is a workplace benefit. So it's offered by your employer. And an HSA similarly is available really only to people

who have high deductible health plans. So not everybody qualifies. But from a tax perspective, they can both really save you some money. Contributions to an FSA are pre-taxed directly from your paycheck. So that means you don't pay taxes on the money you earn if it goes right from your paycheck into your FSA account. HSA contributions are similar. The contributions are tax deductible, and that can lower your tax bill. And one of the great things about that is

you don't even have to itemize to claim the deduction. You may have a few extra forms to fill out, though. One thing that I want to lay out as well is just what these letters mean. FSA stands for a flexible spending account, whereas HSA is a health savings account. Are there any key differences? What makes the FSA more flexible versus the HSA? The weird thing is that the flexible spending account is actually less flexible than an HSA. So with the flexible spending account, you have to spend the money by a certain point or you lose it. With the HSA, you can roll the money over from year to year. And in fact, because you can do that

and because you can invest the money, it's not just sitting there in cash. A lot of financial planners like HSAs almost as much as they like 401ks. It's like they tell you to put money into a 401k to get the match. And then they say, put money in an HSA because it's so flexible and it has what Tina will tell you is a triple tax advantage. Can you talk about that, Tina? Sure. Contributions to an HSA can be tax deductible. So that's one advantage. Can you talk about that, Tina? Sure. Contributions to an HSA can be tax deductible. So that's one advantage. Second is that the growth within the account obviously is tax advantage. And then third, withdrawals from the accounts. If the money is used for qualified health expenses is not taxable. So if you pull the money out, use it for medical expenses at any point, including in retirement, you're golden,

which is pretty cool. There's a pretty significant catch with HSAs, which make me somewhat skeptical of them. And that's that you have to have a high deductible health plan or HDHP. And that makes me a little bit nervous, I think, in part, because I tend to be kind of conservative when it comes to things like this. I don't want to have a lot of out of pocket health care expenses. How do you guys think about that factor? One of the great things about the HSA is that the money is not a use it or lose it kind of account. So you get to keep it forever. So if you are nervous about maybe not spending all of the money that you plan to contribute for the year, don't be. You can keep it. There is no expiration date on it. So I think, Sean, what you're nervous about is the high deductible plan itself, right? That as an option. Yeah. So a high deductible plan is not for everybody. I mean,

your deductible might be thousands of dollars. And if you don't have that money sitting in cash or in the HSA, and you would be tempted to skip healthcare, then I would say a high deductible plan is not for you. And also, if you have kids, I would really do the math because we tried this one year and it didn't work out so great for us. Kids are in the doctor's office a lot. So one of the things you probably should do is look at your healthcare spending or the previous year and see what you would have paid if you had a high deductible healthcare plan versus the one you actually had. And that might help you make up your mind. I know that's technically correct. And that's how I should be approaching this, but I'm more nervous about my future potential costs because we're in the middle of a pandemic

and things seem so uncertain right now that I'm still wary of that high deductible plan. Maybe that's just me. No, I don't think it is just you. I think people do have understandable concerns about this. But again, if you are able to do the high deductible route and you wouldn't skip treatments or medical care, those HSAs have great advantages. I'm glad I did it the year that we did because I've got this little pile of money that I keep investing and it keeps growing, which is great. But as we said, it's not one size fits all. Well, how can someone tell if an HSA or an FSA might be better for them? We talked about a couple

of the factors, but is there anything else that people should keep in mind? With regard to FSAs versus HSAs, an interesting thing about flexible spending accounts is that they're actually two flavors. One is for health expenses, but there are some employers also offer dependent care FSAs, and those are generally for things you would think of as daycare expenses, child care expenses, if you need them to look for work or work. So that can be another way to stretch your budget, not necessarily just for healthcare expenses. So if you're not going the HSA route and you want to do an FSA, can you put a certain amount in the FSA for dependent care and then another amountSA, up to $5,000 a year can be excluded from your income. So this means if it goes right from your paycheck into your FSA, it's money that is

not taxed. So that can stretch your budget. Yeah. Not taxed at all, not even payroll taxes? Correct. Ooh, okay. Well, that's kind of nice. But can I put $2,700 in the healthcare side and then another $5,000 in the healthcare side and then another $5,000 in the dependent care side? It depends on your workplace plan. So you need to check with your HR department to see what's available to you. Well, I love this because there's not very many ways that people who get W-2 income can control their tax bill. Most people choose not to itemize. They're going to take the standard deduction. So something that shaves money off the top and particularly shaves money off so that you don't have to pay payroll taxes,

that's a pretty good deal. Now, there is one key thing to remember with FSAs and that they can be, in general, use it or lose it accounts. So employers, however, can choose if they want to choose to allow you to carry over some of the money for a few months into the following plan year. So you need to check with your employer about what the rules are. And because of COVID, the IRS has recently given employers some additional flexibility about letting people carry money over. Obviously, if you've been putting money into a dependent care FSA for daycare and the daycare has been closed, that's of a concern. So you should check with your HR department to see what your employer plans to do with the plan rules to maybe have some flexibility for you. But again, that's different than an HSA where the money is yours to keep as long as you need it. And one of my favorite tricks is with the healthcare FSA,

it's spending it as early in the year as possible because with the other kind, the dependent care, you can only spend the money as you put it aside. But with the medical FSA, you can spend the money January 1st to January 2nd, even if you haven't already put it in there. We've done this a couple of times when we switched jobs. We actually were able to spend more than we put in. So that's just a thought. Interesting. So if you leave the job that funded that account, you wouldn't have to pay it back even if you already spent the money?

Yeah. The idea is that the employer with the use it or lose it provision, the people who aren't spending the money are kind of offsetting the people who game the system like I did. I mean, that's the only way to put it. Right. But it's totally above board. You're just being pretty clever about how you're using this. Yeah, exactly. Well, is there anything else around funding these accounts that people should know about? No. I mean, I'm thinking about, you know, from a tax perspective, if you know you'll need to spend money out of pocket on medical care or child care this year and you have access to an FSA or an HSA, then running your money through one of these accounts before you pay

the doctor or the daycare provider really can save you money. You can get 100% of the money you earned instead of 100% of the money you earn minus taxes, which is generally what would happen if your employer just deposited your paycheck in your regular checking account. The thing to remember is that the money in your accounts need to go to qualified expenses or else it sort of blows up the tax benefits. So if you're curious about what exactly counts, I would say go to your employer, which probably has a list or a guide of qualified expenses for you. But look there first if you're curious about a specific expense. There's one more tip I wanted to throw in having to do with

health savings accounts. Those are the ones that go with the high deductible plans. And that is a lot of people choose not to use that money for medical expenses. They just keep rolling it over year after year with the idea it's going to pay for medical expenses in retirement. But you might want to keep track of your medical spending anyway and your receipts because you can use those to take the money out tax-free at the end, even if you don't have medical expenses that match up. Did that make sense? It's basically as long as you collect the receipts as you have the expenses, you can use that money at any time. You don't have to match it up to the year where you actually incurred the expenses. Oh, that's excellent. Okay. You're kind of selling me on these accounts now, even though I'm somewhat wary of that.

I think wariness is justified, but especially if you're young and healthy, I think it's worthwhile at least investigating the HSA and seeing if it might be a good fit. And on that note, I look at tax documentation all the time. And for people out there who want to read the rules, who really want to know all the details, there are two good places I would send you. The first one is IRS Publication 969. That has rules for HSAs and FSAs. And another one is IRS Publication 502. And that's all about what counts as qualified for medical expenses. Oh, those are great resources. Thank you, Tina. All right. We can link to those on our show notes post if you want to get super extra nerdy like Tina and read these actual tax documents here. Circling back to Clement's question, which is better, an FSA or HSA? It seems like the answer is really it depends based on your health care needs, your financial circumstances and your tax goals. Is that right? I agree with that. Everybody's tax situation is different. Everybody's. So there's no way to say that one is always better than the other for all people. One thing I'll add is that

in addition to the tax savings, sometimes employers contribute to FSAs and HSAs. And so that's kind of like free money. So again, if you have access to these accounts and your employer is matching or contributing, throwing money in as an incentive, definitely try to take advantage of that if you can and if it works with your situation. So that could make the HSA like a quadruple win financially because you're getting the tax benefits threefold plus the free money from your employer potentially. Yes. Yes. It's possible. And this just requires touching base with your HR department. And if they don't have this benefit,

maybe lobby them a little bit and see if they can do that next year. That's right. Be sure to read what your HR department sends out. Look at it carefully and ask questions. Well, Tina, thank you so much for joining us. I really appreciate it. Anytime.

With that, let's get into our takeaway tips and I can start us off. First up, it's not one size fits all. Everybody's tax situation is different. So spend some time researching your options. Next, HSAs could be a quadruple win. But HSAs require a high deductible health insurance plan, and those aren't for everyone. FSAs could be a better fit. Lastly, you have a limited time to act.

The time to choose and sign up is during open enrollment. And that is all we have for this episode. Do you have a money question of your own? Turn to the nerds and call us or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more info on this episode. And of course, remember to subscribe, rate, and review us wherever you're getting this podcast. And here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and

entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds!