While poor or excess use of credit is often to blame for bankruptcy, medical expenses are in fact the leading cause. Recent studies indicate as many as 62% of all bankruptcy claims were caused by medical expenses and a lack of medical savings. There is no ignoring it. Medical expenses have been rising. Initially, employers tried to shelter employees from some of the increases by passing on only modest co-pay increases. While that strategy worked for a while, most employers have had to migrate to more aggressive strategies including implementing higher deductibles. These higher deductibles and higher overall out-of-pocket expenses can present financial pressure for many employees. Thus, enter the Health Savings Account (HSA) and Flexible Spending Account (FSA).
Health Savings Accounts allow employees (and employers) to contribute to a tax-free account to be used for eligible medical expenses. The HSA is combined with an HSA-qualified health plan (also referred to as a high deductible health plan). The health plan is designed to provide comprehensive coverage once the deductible and out-of-pocket maximum is met. The HSA provides a savings mechanism to pay for out-of-pocket expenses. The advantage of the HSA is that the funds roll over from year-to-year, thus allowing employees to build a nest egg for potential medical expenses in the future.
Flexible Spending Accounts are designed to provide employees with an opportunity to set aside funds on a pre-tax basis to pay for eligible out-of-pocket medical expenses. FSAs can be combined with any health plan offering. Employers can opt to permit up to $500 to roll from one plan year to the next.
Both accounts encourage employees to take a closer look at their financial well-being by setting money aside for anticipated and future medical expenses.