Money Rehab with Nicole Lapin

Episode: Defining FSAs & HSAs and How To Make Them Work For You
Host/Author: Money News Network

Introduction

In this episode of Money Rehab, host Nicole Lapin demystifies Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), empowering listeners to make informed decisions about their healthcare finances. With open enrollment season underway, understanding these financial tools is crucial for optimizing health-related expenses and maximizing savings.

Listener Feedback: Jason Pfeiffer's Frustration with FSAs

Nicole opens the episode by sharing a voice note from Jason Pfeiffer, the editor-in-chief of Entrepreneur magazine and co-host of Help Wanted podcast. Jason expresses his frustration with FSAs, highlighting common pain points users face:

Jason Pfeiffer [00:55]: "Why am I supposed to use an HSA Health Savings Account?... 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?"

Nicole clarifies that Jason was referring to FSAs, not HSAs, setting the stage for a deeper exploration of both accounts.

Understanding FSAs and HSAs

Nicole provides a foundational overview of FSAs and HSAs, emphasizing their role in allowing individuals to save pre-tax money for healthcare expenses. She lists eligible items beyond traditional medical costs, such as first aid kits, sunscreen, and even certain beauty products:

Nicole Lapin [01:15]: "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... Sephora actually has an entire section on their site for FSA eligible items."

She highlights that using pre-tax dollars can lead to significant savings—estimated at around 30% on medical purchases.

FSAs vs. HSAs: Key Differences

Nicole employs a relatable analogy to differentiate between FSAs and HSAs:

Nicole Lapin [01:45]: "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."

FSAs (Flexible Spending Accounts):

• Employer-Provided: Typically offered through employers, with contributions deducted from pre-tax pay.
• Use-It-or-Lose-It: Funds must be used within the plan year, though some employers may allow a rollover up to $640 for 2024.
• Immediate Access: The entire annual contribution is available at the start of the year.
• Eligible Expenses: Includes both basic and quirky items like baby monitors and gym memberships with a doctor's note.

HSAs (Health Savings Accounts):

• Ownership: Owned by the individual, not tied to an employer, making them accessible even for the self-employed.
• Long-Term Savings: Funds roll over year to year and can be invested, growing tax-free.
• High Deductible Plans: Must be paired with a high deductible health plan (HDHP).
• Flexible Withdrawals: After age 65, funds can be used for non-medical expenses with income tax applied, similar to an IRA.

Maximizing the Benefits of FSAs

Nicole discusses strategies to fully utilize FSAs before funds expire:

Nicole Lapin [02:10]: "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."

Tips for FSAs:

• Plan Ahead: Estimate annual medical expenses to avoid losing unused funds.
• Explore Eligible Expenses: Look beyond obvious medical costs to maximize spending.
• Rollover Options: Check with your employer about the specific rollover limits and policies.

Harnessing the Power of HSAs

Nicole delves into the advantages of HSAs as powerful financial tools:

Nicole Lapin [02:30]: "HSAs are like a tax haven that's accessible. A lot of tax havens are only accessible to the very rich, but HSAs are for everyone."

Benefits of HSAs:

• Tax Advantages: Contributions are pre-tax, growth is tax-free, and withdrawals for eligible expenses are tax-free.
• Investment Potential: Funds can be invested similarly to retirement accounts, allowing for long-term growth.
• Flexibility: No time limits on reimbursements, and funds can serve as an emergency or retirement fund.
• Portability: Remain with the individual regardless of employment changes.

Investment Strategies:

• Choose the Right Provider: Look for HSA providers that offer robust investment options and support.
• Automate Investments: Utilize providers with robo-advising or automatic rebalancing to simplify investment management.
• Long-Term Growth: Allow funds to grow tax-free and leverage compound interest for substantial savings over time.

Premiums vs. Deductibles: Making the Right Choice

Nicole explains the difference between insurance premiums and deductibles and how they influence the decision to choose an FSA or HSA:

Nicole Lapin [03:00]: "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."

Understanding the Terms:

• Premiums: The monthly cost paid to maintain health insurance.
• Deductibles: The amount paid out-of-pocket before insurance begins to cover expenses.

She cites a study revealing that many individuals overpay on premiums while under-saving for retirement, suggesting that opting for higher deductibles and contributing to an HSA can be financially beneficial.

Additional Financial Tools: Coverdell Education Savings Account

As a bonus tip, Nicole introduces the Coverdell Education Savings Account for parents seeking tax-advantaged accounts for their children’s education:

Nicole Lapin [03:30]: "If you have kids and are looking for another tax advantaged account, check out the Coverdell Education Savings Account."

Key Features:

• Contribution Limits: Up to $2,000 per year.
• Flexibility: Can cover private school tuition, school supplies, and after-school care.
• Investment Options: Offers more investment choices compared to traditional 529 plans, potentially providing better growth opportunities.

Conclusion

Nicole wraps up the episode by encouraging listeners to take control of their financial health through informed decisions regarding FSAs and HSAs. She reiterates the importance of leveraging these accounts to save money, invest for the future, and ensure financial security in the face of medical expenses.

For personalized financial advice or to have questions answered on the show, listeners are invited to email moneyrehab@moneynewsnetwork.com. Follow Money Rehab on Instagram (@moneynews) and TikTok (@moneynewsnetwork) for exclusive content.

Credits:

• Executive Producer: Morgan Lavoy
• Researcher: Emily Holmes

Thank you for tuning into Money Rehab. Remember, investing in your financial knowledge is the most important investment you can make.