In the United States, health insurance premiums are tax deductible (if paid through out-of-pocket expenses), but out-of-pocket expenses are not. However, there are exceptions to this rule. These include two frequently used tax-advantaged accounts:
- Flexible Savings Accounts (FSA). These accounts allow employees to set aside a portion of their pre-tax income to cover qualified medical expenses; However, if the employee does not use these funds by the end of the year, they will be lost.
- Health Savings Accounts (HSA). HSAs also allow employees to save pre-tax income to cover qualified medical expenses, but unlike FSAs, HSA balances roll over from year to year. While anyone with a qualified plan can enroll in an FSA, only employees who enroll in a high-deductible health plan (HDHP) can contribute to an HSA.
How does having an FSA or HSA affect healthcare expenses? an article from Ding and Glied (2024) Use data on health care spending for working-age adults from the 2011-2019 Medical Expenditure Panel Survey (MEPS) to find the answer. Their study found that:
…families with FSAs spent a mean of 20% or $2,033 (95% CI, $789-$3,276) more on health care annually than families without accounts, largely due to increased expenses paid by insurers. Families with HSAs spent a mean of 44% or $697 (95% CI, $521-$873) more on out-of-pocket expenses and had insignificantly higher insurance-paid expenses than families without accounts, resulting in overall expenses comparable to those of families without accounts. –account holders. Additional tax expenses associated with FSAs were a mean of $1,306 (95% CI, $536-$2,076) annually per family.
You can read the full article. here.
