Health Insurance: What to Do When You're On Your Own

FSAs, HSAs and Dependent Care Accounts

We're big fans of the Flexible Spending Account (FSA), which is offered to employees by many large companies. An FSA is a tax-sheltered account that you open at the start of the calendar year. A couple filing jointly may contribute up to $5,000 a year and use the money throughout the year to pay for family medical expenses that your health insurer won't reimburse. All of these expenses are in pre-tax dollars, so your taxable income is lower.

Dolan Smart Money Move: The only hitch to FSAs is that if you don't spend the money by the end of the year, you don't get back whatever is left. It's use it or lose it. Dentists and optometrists tend to get busy in December, with patients seeking to spend their FSA money on tooth capping, eyeglasses, and such.

Take a good look at your needs and be smart about how much you decide to contribute to the account. It's better to set aside less and use it all than set aside too much and lose it.

If your employer does not offer a FSA, you may be eligible for a Health Savings Account (HSA), the newest version of what used to be called the Medical Savings Account (MSA).

With a HSA, you don't have to spend all the money each year. You can let it accumulate so that you'll have a tax-sheltered nest egg for medical expenses when you retire, and you pay no taxes on withdrawals as long as you use the money for medical expenses.

There's one big stipulation, though: To take advantage of HSAs, you must be covered by a High Deductible Health Plan (HDHP). These are health insurance plans that feature high deductibles (usually several thousand dollars) and, therefore, lower premiums. They are sometimes called catastrophic health plans.

If you're in good health, a HDHP is better than nothing–but not much better. It will pay for the hospital stay if you should need major medical care, but here's the catch: In most cases, the doctors who treat you will bill you separately. Your hospital room and the inedible food will be covered–and these are significant costs. However, you could still wind up paying thousands of dollars for such costs as ambulance, anesthesia, the physician's fees for surgery and follow-up visits, medicine, X rays, and tests.