MONEY health insurance

What’s the Difference Between a HSA and a FSA?

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Chris Stein—Getty Images

And which should I use?

I recently started a new job and am choosing my health insurance benefits. It looks like I have the option of using a health savings account (HSA) or a flexible spending account (FSA) to set money aside for medical costs. But I don’t know which is better, and the language in my benefits paperwork is confusing. Can you help?

Answer:

Setting aside money for health care costs is a savvy move, but your confusion is understandable. Choosing the right health benefits can be tricky, and with several key differences between HSAs and FSAs, it literally pays to get this decision right.

Both HSAs and FSAs allow employees with health insurance to set aside money for health care costs referred to as “qualified expenses,” including deductibles, copayments and coinsurance, and monthly prescription costs. Sometimes employers will also contribute funds to these accounts. In most cases, you receive a debit card for your account and can use it to pay for qualifying expenses throughout the year. Both types of accounts have tax benefits, too, although those benefits aren’t the same.

In general, electing to sign up for an HSA or FSA is smart. Knowing which one to select and how to get the most out of it will take some education.

Are you eligible for an HSA?

Health savings accounts are not available to everyone. This is the first key difference, and if you aren’t eligible for an HSA, it makes your decision much easier. Only people who have high deductible health plans, or HDHPs, can select an HSA.

For 2015, an HDHP is defined as health insurance with a deductible of $1,300 or more for an individual or $2,600 or more for a family. To qualify for an HSA, this HDHP must be your only health insurance plan, you must not be eligible for Medicare and you cannot be claimed as a dependent on someone else’s tax return.

Important differences between FSAs and HSAs

As you can see in the following table, there are several additional differences between these accounts. Things like your flexibility in contributing, the ability to keep your unused balance and additional tax benefits make HSAs the wisest choice if you have the option. Still, either account stands to save you money and make budgeting for medical costs easier.

Health savings account (HSA) Flexible spending account (FSA)
Eligibility requirements
  • No eligibility requirements
Contribution limit
  • 2015 contributions capped at $2,550
Changing contribution amount
  • You can change how much you contribute to the account at any point during the year.
  • Contribution amounts can be adjusted only at open enrollment or with a change in employment or family status.
Rollover
  • Unused balances roll over into the next year.
  • With a few exceptions, FSAs are “use it or lose it,” and you forfeit any unused balance.
Connection to employer
  • Your HSA can follow you as you change employment.
  • In most cases, you’ll lose your FSA with a job change. One exception: if you’re eligible for FSA continuation through COBRA.
Effect on taxes
  • Contributions are tax-deductible, but can also be taken out of your pay pretax. Growth and distributions are tax-free.
  • Contributions are pretax, and distributions are untaxed.

You cannot choose both, unless …

If you qualify for an HSA, you cannot elect to set up both an HSA and an FSA, unless the FSA is a “limited purpose” FSA. Your HR representative will be able to tell you if this is the case at your new job.

A limited purpose FSA works like a regular FSA but can be used only for vision care and dental expenses. If you expect to have high medical costs throughout the year, or want to maximize contributions to your HSA while minimizing your withdrawals, using a limited purpose FSA for expected vision and dental expenses could be a smart choice.

Which should you choose?

Both accounts have benefits that can make managing your out-of-pocket medical expenses easier throughout the year. But you should opt for an HSA if you qualify, if for no other reason than the limits are higher and you can carry over your contributions from year to year. If you don’t qualify, sign up for the FSA.

A good rule of thumb as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs, anticipated doctor’s visits and any planned treatments or surgeries. Also, don’t be afraid to ask your HR representative as you come across questions; you can’t be expected to know all of the ins and outs of your new benefits.

More From NerdWallet:

MONEY Ask the Expert

Why a High Income Can Make It Harder to Save for Retirement

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Robert A. Di Ieso, Jr.

Q: My employer’s 401(k) plan considers me a “highly compensated” employee and caps my contribution at a measly 5%. I know I am not saving enough for retirement. What are the best options to maximize my retirement savings? I earn $135,000 a year and my wife makes $53,000. – E.O., Long Island, NY

A: It’s great to have a six-figure income. But, ironically, under IRS rules, being a highly compensated worker can make it harder to save in your 401(k).

First, some background on what it means to be highly compensated. The general rule is that workers can put away $18,000 a year in pre-tax income in a 401(k) plan. But if you earn more than $120,000 a year, or own more than a 5% stake in your employer’s company, or are in the top 20% of earners at your firm, you are considered a “highly compensated employee” (HCE) by the IRS.

As an HCE, you’re in a different category. Uncle Sam doesn’t want the tax breaks offered by 401(k)s only to be enjoyed by top executives. So your contributions can be limited if not enough lower-paid workers contribute to the plan. The IRS conducts annual “non-discrimination” tests to make sure high earners aren’t contributing disproportionately more. In your case, it means you can put away only about $6,000 into your plan.

Granted, $120,000, or $135,00, is far from a CEO-level salary these days. And if you live in a high-cost area like New York City, your income is probably stretched. Being limited by your 401(k) only makes it more difficult to build financial security.

There are ways around your company’s plan limits, though neither is easy or, frankly, realistic, says Craig Eissler, a certified financial planner with Halbert Hargrove in Houston. Your company could set up what it known as a safe harbor plan, which would allow them to sidestep the IRS rules, but that would mean getting your employer to kick in more money for contributions. Or you could lobby your lower-paid co-workers to contribute more to the plan, which would allow higher-paid employees to save more too. Not too likely.

Better to focus on other options for pumping up your retirement savings, says Eissler. For starters, the highly compensated limits don’t apply to catch-up contributions, so if you are over 50, you can put another $6,000 a year in your 401(k). Also, if your wife is eligible for a 401(k) or other retirement savings plan through her employer, she should max it out. If she doesn’t have a 401(k), she can contribute to a deductible IRA and get a tax break—for 2015, she can contribute as much as $5,500, or $6,500 if she is over 50.

You can also contribute to an IRA, though you don’t qualify for a full tax deduction. That’s because you have a 401(k) and a combined income of $188,000. Couples who have more than $118,000 a year in modified adjusted gross income and at least one spouse with an employer retirement plan aren’t eligible for the tax break.

Instead, consider opting for a Roth IRA, says Eissler. In a Roth, you contribute after-tax dollars, but your money will grow tax-free; withdrawals will also be tax-free if the money is kept invested for five years (withdrawals of contributions are always tax-free). Unfortunately, you bump up against the income limits for contributing to a Roth. If you earn more than $183,000 as a married couple, you can’t contribute the entire $5,500. Your eligibility for how much you can contribute phases out up to $193,000, so you can make a partial contribution. The IRS has guidelines on how to calculate the reduced amount.

You can also make a nondeductible contribution to a traditional IRA, put it in cash, and then convert it to a Roth—a strategy commonly referred to as a “backdoor Roth.” This move would cost you little or nothing in taxes, if you have no other IRAs. But if you do, better think twice, since those assets would be counted as part of your tax bill. (For more details see here and here.) There are pros and cons to the conversion decision, and so it may be worthwhile to consult an accountant or adviser before making this move.

Another strategy for boosting savings is to put money into a Health Savings Account, if your company offers one. Tied to high-deductible health insurance plans, HSAs let you stash away money tax free—you can contribute up to $3,350 if you have individual health coverage or up to $6,650 if you’re on a family plan. The money grows tax-free, and the funds can be withdrawn tax-free for medical expenses. Just as with a 401(k), if you leave your company, you can take the money with you. “So many people are worried about paying for health care costs when they retire,” says Ross Langley, a certified public accountant at Halbert Hargrove. “This is a smart move.”

Once you exhaust your tax-friendly retirement options, you can save in a taxable brokerage account, says Langley. Focus on tax-efficient investments such as buy-and-hold stock funds or index funds—you’ll probably be taxed at a 15% capital gains rate, which will be lower than your income tax rate. Fixed-income investments, such as bonds, which throw off interest income, should stay in your 401(k) or IRA.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Why Regular Retirement Saving Can Improve Your Health

MONEY Taxes

The Procrastinator’s Guide to Finishing Your Taxes

flicking wads of paper to procrastinate
Daniel Grizelj—Getty Images Just because I'm not typing doesn't mean I'm not working on my taxes.

The deadline to file your 2014 income tax return is hours away. If you're not done, you're not alone. And you have plenty of options.

I’ll admit it. I’m an editor at a personal finance magazine and website, it’s April 14, and I haven’t yet finished my 2014 tax return. I’m usually a March filer, but, hey, life got in the way this year.

As of 10 days ago, the IRS had received 99 million tax returns, about two-thirds of what the agency expects. So there are tens of millions of us scrambling to reach the finish line. Here’s what you can do if you, too, have put off doing your taxes.

You can file for an extension. It’s a super short and simple form (4868), you can file it online through IRS Free File, and you get another six months to finish just by asking. See you on October 15, Mr. Tax Man!

The rub is that you have to estimate what you owe and send that in, which may feel like as much work as filling out a tax return. “If you’re not 100% certain of the balance due, be conservative and round up,” says Melissa Labant, director of tax advocacy for the American Institute of CPAs. If it turns out you overpaid, you’ll get a refund later or you can apply the excess to next year’s tax bill.

One more thing: Don’t forget to see if your state requires a separate application for an extension.

Reach out to the IRS if you don’t have the cash. When you can’t pay your tax bill in full, you’re looking at penalties and interest. “If you come up with your number by Wednesday but are short the money in your checking account, you have options,” says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting US.

As long as you owe $50,000 or less, you can apply for an online payment agreement from the IRS, which lets you spread out the bill over 120 days. Another option: Put the bill on your credit card—the roughly 2% fees might be less than the interest and penalties you’d otherwise face.

April 15 is still your last best chance to cut your tax bill. Other than scouring your files for overlooked deductions or forgotten charitable gifts, you can’t do much at this point to trim your 2014 tax bill—with one important exception. You can fund an individual retirement account for 2014, Roth or traditional, right up until April 15. But that’s a hard deadline, even if you get an extension.

As long as your income is below certain thresholds—$70,000 for single filers if you are covered by a retirement plan at work, $116,000 for married couples filing jointly—you’ll be able to deduct at least part of your contribution to a traditional IRA, thus trimming your tax bill. The most you can put in for 2014 is $5,500, and $6,500 if you’re 50 or older.

Once you’ve scrambled to fund your IRA, carve out some time to think about how you want to invest it. A study by Vanguard found that between January and April—i.e., tax season—IRA contributions are more likely to end up in money market funds (which nowadays pay zilch). And those last-minute investments are also more likely to be left to languish in cash.

Two more last-minute moves can cut your tax bill, though not as much as the IRA contributions. One: Those with self-employment income can still fund a SEP-IRA for 2014. And two: If you have a health savings account, you can still top off your 2014 plan—a max of $3,300 for singles, $6,550 for families—and those contributions are also deductible.

Questions? You’re pretty much on your own. The IRS phone lines are so swamped and undermanned that even the agency urges taxpayers to go to IRS.gov for help. Taxpayer advocate Nina Olson recently reported that only 25% of taxpayers are getting through to a live person, with a wait time of 22 minutes. Really stumped? File for an extension, advises Luscombe.

How about hiring a tax preparer on April 14? You might find a pro who’ll take you on, says Labant, but be prepared to have him or her file an extension for you and then help you out once the crunch is over.

Another option for more than two-thirds of taxpayers: As long as your income is below $60,000, you can get access to free commercial tax filing software via IRS free file.

In your dash to the finish line, don’t make dumb mistakes. Those include math errors, the wrong Social Security number (yours or your dependents’), and no signature on a paper return.

Those flubs can hold up your return (and your refund). What’s worse are mistakes that cost you money. To make sure you’re not missing any deductions (or failing to report any income), Labant suggests this extra step. “Sit back and compare your return to last year’s,” she says. Is there a deduction you took before that’s missing this year? Or an income source you reported for 2013 that escaped your 2014 return?

No time for even that quick exercise? I implore you: Seriously think about filing for an extension.

And don’t make a perfectly understandable flub. This year, you have a brand new chance to mess up. For the first time, you have to report whether you had health insurance last year (and possibly pay a penalty if you don’t). “Any time there’s something new, there’s a high error rate,” says Luscombe.

This requirement is simple enough if you got coverage through work or Medicare—you just check a box. Things get thornier if you bought an individual policy on an insurance marketplace and got a tax credit to subsidize your premium (hello, Form 8962), or if you’re applying for an exemption or calculating your penalty (Meet Form 8965).

To make matters worse, the federal government sent out 800,000 incorrect 1095-A forms to folks who bought policies on an exchange. Plus, H&R Block estimates that about half of those who got subsidies have to repay at least some of the money.

You can read about all of this at the IRS Affordable Care Act Q&A page. That could take some time. You know you can get an extension, right?

Remember: You can take a do-over. If you push through to make the deadline, then wake up on April 16 and realize you messed up, you can file an amended return. However, you might want to wait a few weeks, says Luscombe. That way the IRS won’t process your second return first and treat your original return as the amended one.

Vow to reform your ways. Do you hate the stress of filing at the last minute? “Don’t procrastinate again next year,” says Labant. Duly noted. Right after I file for my extension.

MONEY Taxes

11 Smart Ways to Use Your Tax Refund

Tax refund check with post-it saying "$$$ for Me"
Eleanor Ivins—Getty Images

You could pay down debt, travel, tend to your health, or shrink your mortgage, among many other ideas.

Here we are, in the thick of tax season. That means many mailboxes and bank accounts are receiving tax refunds. A tax refund can feel like a windfall, even though it’s really a portion of your earnings from the past year that the IRS has held for you, in case you owed it in taxes. Still, it’s a small or large wad of money that you suddenly have in your possession. Here are some ideas for how you might best spend it.

First, though, a tip: If you’re eager to spend your refund, but haven’t yet received it, you can click over to the IRS’s “Where’s My Refund?” site to track its progress through the IRS system. Now on to the suggestions for things to do with your tax refund:

Pay down debt: Paying down debt is a top-notch idea for how to spend your tax refund — even more so if you’re carrying high-interest rate debt, such as credit card debt. If you owe $10,000 and are being charged 25% annually, that can cost $2,500 in interest alone each year. Pay down that debt, and it’s like earning 25% on every dollar with which you reduce your balance. Happily, according to a recent survey by the National Retail Federation, 39% of taxpayers plan to spend their refund paying off debt.

Establish or bulk up an emergency fund: If you don’t have an emergency fund, or if it’s not yet able to cover your living expenses for three to nine months, put your tax refund into such a fund. You’ll thank yourself if you unexpectedly experience a job loss or health setback, or even a broken transmission.

Open or fund an IRA: You can make your retirement more comfy by plumping up your tax-advantaged retirement accounts, such as traditional or Roth IRAs. Better yet, you can still make contributions for the 2014 tax year — up until April 15. The maximum for 2014 and 2015 is $5,500 for most folks, and $6,500 for those 50 or older.

Add money to a Health Savings Account: Folks with high-deductible health insurance plans can make tax-deductible contributions to HSAs and pay for qualifying medical expenses with tax-free money. Individuals can sock away up to $3,350 in 2015, while the limit is $6,650 for families, plus an extra $1,000 for those 55 or older. Another option is a Flexible Spending Account (FSA), which has a lower maximum contribution of $2,550. There are a bunch of rules for both, so read up before signing up.

Visit a financial professional: You can give yourself a big gift by spending your tax refund on some professional financial services. For example, you might consult an estate-planning expert to get your will drawn up, along with powers of attorney, a living will, and an advance medical directive. If a trust makes sense for you, setting one up can eat up a chunk of a tax refund, too. A financial planner can be another great investment. Even if one costs you $1,000-$2,000, they might save or make you far more than that as they optimize your investment allocations and ensure you’re on track for a solid retirement.

Make an extra mortgage payment or two: By paying off a little more of your mortgage principle, you’ll end up paying less interest in the long run. Do so regularly, and you can lop years off of your mortgage, too.

Save it: You might simply park that money in the bank or a brokerage account, aiming to accumulate a big sum for a major purchase, such as a house, new car, college tuition, or even starting a business. Sums you’ll need within a few or as many as 10 years should not be in stocks, though — favor CDs or money market accounts for short-term savings.

Invest it: Long-term money in a brokerage account can serve you well, growing and helping secure your retirement. If you simply stick with an inexpensive, broad-market index fund such as the SPDR S&P 500 ETF, Vanguard Total Stock Market ETF, or Vanguard Total World Stock ETF, you might average as much as 10% annually over many years. A $3,000 tax refund that grows at 10% for 20 years will grow to more than $20,000 — a rather useful sum.

Give it away: If you’re lucky enough to be in good shape financially, consider giving some or all of your tax refund away. You can collect a nice tax deduction for doing so, too. Even if you’re not yet in the best financial shape, it’s good to remember that millions of people are in poverty and in desperate need of help.

Invest in yourself: You might also invest in yourself, perhaps by advancing your career potential via some coursework or a new certification. You might even learn enough to change careers entirely, to one you like more, or that might pay you more. You can also invest in yourself health-wise, perhaps by joining a gym, signing up for yoga classes, or hiring a personal trainer. If you’ve been putting off necessary dental work, a tax refund can come in handy for that, too.

Create wonderful memories: Studies have shown that experiences make us happier than possessions, so if your financial life is in order, and you can truly afford to spend your tax refund on pleasure, buy a great experience — such as travel. You don’t have to spend a fortune, either. A visit to Washington, D.C., for example, will get you to a host of enormous, free museums focused on art, history, science, and more. For more money, perhaps finally visit Paris, go on an African safari, or take a cruise through the fjords of Norway. If travel isn’t of interest, maybe take some dance or archery lessons, or enjoy a weekend of wine-tasting at a nearby location.

Don’t end up, months from now, wondering where your tax refund money has gone. Make a plan, and make the most of those funds, as they can do a lot for you. Remember, too, that you may be able to split your refund across several of the options above.

MONEY Health Care

The Good News and the Bad News About Health Care Costs

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iStock

The growth of health care costs is slowing, but we're still paying more and getting less

The latest study on health care premiums is a good news/bad news situation. The good news is that premium increases are slowing. The bad news is that you aren’t seeing the savings.

Out-of-pocket health care costs—defined as premiums plus deductibles—now account for 9.6% of median income, up from 5.3% ten years ago, according to the latest report from the Commonwealth Fund, a non-profit health care research group.

That’s partly because health care costs have been rising much faster than incomes. From 2010 to 2013, premiums increased “just” 4.1% a year. (That might sound like a lot, but it’s an improvement from the 5.1% yearly rise between 2003 and 2010.) Meanwhile, from 2003 to 2013, median incomes rose only 1.2% a year on average.

And even as wages have stalled, employers have asked workers to shoulder more of their own health care costs. Deductibles for single coverage have more than doubled since 2003. Today, on average, Americans need to spend 3.8% of their income before health insurance kicks in. And as premiums have gotten 60% more expensive, employers have asked employees to cover an even bigger share of the total cost. You’re paying more, in other words, but getting less.

Your move? Change the way you budget for health care. Here’s how to keep your costs down in 2015.

1) Consider a high-deductible plan.

Sometimes, but not always, a high-deductible plan actually provides a better value than a plan with a lower deductible. While high-deductible plans make you pay more out-of-pocket, you should pay less out of your paycheck every month. According to the Kaiser Family Foundation, the average high-deductible plan for a single person has a $2,215 deductible and will cost you $905 in premiums. Compare that to the average single coverage PPO plan, which has a $843 deductible and will cost you $1,134 in premiums. If you rarely go to the doctor, you’ll save more every pay period with the high-deductible plan.

Employers love this kind of plan because it’s cheaper for them—remember, they’re still paying the bulk of your premiums—so 76% of employers offer financial incentives to encourage you to switch.

Before you make the jump, compare the amount of money you would save from lower premiums to the amount of exposure you face because of the higher deductible. Here’s how to decide which is right for you.

2) Use a health savings account.

About 70% of the Americans struggling with medical debt are actually insured, according to the Kaiser Family Foundation. How does that happen? Well, the Commonwealth Foundation found that the average deductible for single coverage is $1,273—and 62% of Americans don’t have savings to cover a $1,000 emergency room visit, according to Bankrate.

That’s why Americans with high deductibles need an emergency fund to cover unexpected medical costs. The best place for that special health-emergency fund is a health savings account (HSA), a tax-advantaged savings vehicle. You qualify for one if your deductible is at least $1,300 for an individual plan or $2,600 for a family plan. If your employer doesn’t offer one, you can open it on your own. Try to save at least the amount of your deductible. Unlike the “use it or lose it” money in flexible spending accounts, HSA savings roll over year to year; and if you don’t end up spending it on health care, you can use it for anything in retirement.

3) Check the price tags.

It’s still way too difficult to figure out how much a given medical procedure will cost ahead of time. But insurers and employers are trying to make it easier to chose less expensive options when they are available and convenient. According to Mercer, 77% of large employers now offer a price transparency tool to help you look up doctors ahead of time to and compare typical costs and quality ratings.

Using it can help you save, especially on procedures like MRIs and CT scans. A study from the Journal of the American Medical Association found that consumers who used a pricing tool before choosing an advanced imaging service saved $124.74 on average.

MONEY Health Care

4 Smart Year-End Strategies for Maximizing Your Health Benefits  

Tray of dental instruments
Peter Dazeley—Getty Images Dental plans often have annual coverage caps. Have you used up yours yet?

In these winter months, don't overlook these valuable health perks—and the crucial deadlines for getting your money's worth.

The first and last months of the year can be the best time to use your health insurance benefits. Here’s how to make the most of four common scenarios:

You’ve Met Your Deductible

This is the amount you must pay for your own health care before your insurance starts covering a larger portion of the costs. If you’re close to that cut-off, consider a last-minute appointment, says Carrie McLean, director of customer care at online insurance exchange eHealth.com.

“If you’ve already met your deductible for 2014, or are close to it, medical care rendered before the end of the year may be covered at a lower out-of-pocket cost,” McLean says. “Conversely, if you expect to have a lot of health care expenses in 2015, you may want to schedule non-emergency medical care for early next year so you can fulfill your deductible as soon as possible.”

You Have Unused Dental Benefits

In most cases, dental coverage works differently from regular health insurance. This benefit is often capped at $1,000 to $3,000 annually, according to the American Dental Association. If you have unused benefits remaining, now may be the time to schedule a last-minute appointment, especially if you might need serious dental work soon. That way, you can spread the cost over both years and pay less out of pocket for dental care.

You Have an Leftover FSA Money

If you set up a flexible spending account, or FSA, through your employer as a supplemental benefit to your health insurance, you were able to contribute pre-tax money to it each year and use that money for qualifying health expenses. Now’s the time to check your balance.

Some FSAs allow you to roll over up to $500 of unused funds into the following year, or give you a 2 1/2-month grace period to spend the money, but many don’t. In that case, you’ll forfeit your remaining balance.

If you have funds left in your FSA, or you are over your rollover limit, it’s time to spend the money. The good news is that a lot of expenses qualify, starting with purchases you’ve already made. If you can prove it, you can reimburse yourself for health costs you paid earlier in the year, says Craig Rosenberg, benefits specialist at human resource firm Aon Hewitt.

“Check to see if there are any out-of-pocket health care expenses you haven’t submitted for reimbursement. It’s easy to forget co-pays, prescription drug expenses, or certain medical supplies,” says Rosenberg.

“December can be a good time to stock up on health supplies,” he adds, and that goes for a lot of expenses, from bandages to braces and more.

If your FSA has a grace period, you have until March 15, 2015 to use your 2014 funds. In that case, it might be a good idea to schedule checkups for January so the costs count toward next year’s deductible. Check your FSA summary of benefits first, because in some cases that grace period is only for vision and dental expenses.

You Have an HSA

Whatever you do, don’t confuse your health savings account, or HSA, with an FSA and hurry to spend it, Rosenberg says. “FSAs have ‘use-it-or-lose-it’ rules that apply each year, but HSAs do not,” he says. “Any funds in your HSA are yours to keep indefinitely, even if you change jobs.”

Some even look at HSAs as a retirement savings vehicle since the funds can be used to pay for Medicare premiums and medical costs in retirement. That’s a big deal: Fidelity Investments estimates that the average couple retiring this year will face $220,000 in medical costs in retirement.

You may even want to add funds to your HSA now, McLean says. “Maximize on your tax saving by funding [the HSA] fully before year’s end,” she says, but know the limit. The contribution cap for HSAs in 2014 is $3,300 for individuals, or $6,550 for families.

Lacie Glover writes for NerdWallet Health, a website that helps consumers lower their medical bills.

MONEY Health Care

Why Millennials Hate Their Least Expensive Health Care Option

Health plans that shift more up-front costs onto you are rapidly becoming the norm. But millennials don't seem happy about taking on the risk, even in exchange for a lower price.

Millennials want their parents’ old health insurance plan. A new survey from Bankrate found that almost half of 18-to-29-year-olds prefer a health plan with a lower deductible and higher premiums—meaning millennials would rather pay more out of their paycheck every month and pay less when they go to the doctor. Compared to other age groups, millennials are the most likely to prefer plans with higher premiums.

That surprised Bankrate insurance analyst Doug Whiteman. “One would assume people in this age group were not likely to get sick, so they’d choose the cheapest possible plan just to get some insurance,” he says.

In theory, millennials are perfect candidates for high-deductible plans. The conventional wisdom is that since young and healthy people tend to have very low health-care costs, they should opt for a higher deductible and keep more of their paychecks.

If, for example, you go to the doctor only for free preventive care, switching from the average employer-sponsored traditional PPO plan to the average high-deductible health plan would save a single person $229 a year in premiums, according to the Kaiser Family Foundation’s 2014 data.

Millennials shopping in the new health insurance marketplace last year didn’t want the cheapest plans either. According to the Department of Health and Human Services, more than two-thirds of 18-to-34-year-olds chose silver plans, which have mid-level premiums and deductibles. Only 4% picked catastrophic plans, the ones with the lowest premiums and out-of-pocket limits of around $6,000.

Why Millennials Are Risk Averse

Why are millennials choosing to pay more for health care? Turns out the “young invincibles” don’t feel so invincible after all, says Christina Postolowski, health policy manager at a youth advocacy group called—as it happens—Young Invincibles. “Millennials are risk-averse and concerned about their out-of-pocket costs if something happens to them,” Postolowski says.

High-deductible plans saddle young adults with risk they can ill afford. According to Kaiser, the average employer-sponsored high-deductible plan made singles pay $2,215 out-of-pocket in 2014 before they ever saw a co-pay.

Yet according to Bankrate, 27% of 18-to-29-year-olds have no emergency savings. A $2,200 bill could sink them. Indeed, Bankrate found that the two groups most likely to prefer a low-deductible plan are millennials and those with incomes between $30,000 and $49,999.

“Young people don’t have money in a bank account to pay for high deductibles,” Postolowski says. “Our generation is carrying $1.2 trillion in student loan debt. An unexpected medical incident isn’t just physical pain. It can be economic pain too.”

That’s why Bankrate’s Whiteman thinks millennials are being “really smart.”

“One of the concerns I have is too many people might only look at the price and neglect the fact that some of these plans that seem really cheap can come with deductibles as high at $6,000,” he says. “That’s a significant amount of money out of your own pocket.”

Fighting the Tide

Some young workers, however, have little choice, or won’t soon. Employers are increasingly shifting to health plans that make workers shoulder more of the costs. Towers Watson found that 74% of employers plan to offer high-deductible plans in 2015, and 23% of them will make it the only option.

Plus, across all employer plans, you have to pay more out-of-pocket than in years past. According to Kaiser, the average deductible for single coverage in 2014 was $1,217, up 47% from five years ago. The generous, low-deductible health plan your parents once had probably won’t be available to you.

How to Make the Best of It

If you end up in a high-deductible plan, learn to make the most of the tax-free savings plan that goes with it—a health savings account (HSA). Yeah, a monthly HSA contribution is one more recurring expense on top of your student loan payments, car payments, rent, and (hopefully) 401(k) contributions. But at least this one can give you the peace of mind that you’ll have the funds to cover a health emergency.

Here’s how an HSA works: You make contributions with pre-tax income. The money carries over year-to-year. You can invest the funds in your HSA, the way you invest the money in your 401(k), and the account will grow tax-free. If you need the money for medical expenses, you withdraw it, again, tax-free. Or, if you stay healthy and have money leftover at age 65, you’re free to spend it on anything.

You qualify for an HSA if your deductible for single coverage is $1,300 or more, or $2,600 for family coverage (and if you’re not claimed as a dependent on someone else’s tax return). And your company might help you out. Some employers make contributions to their employees’ HSAs, of $1,006 a year on average, according to Kaiser.

For ultimate peace of mind, save enough to cover your entire deductible. But if you’re feeling pinched, at least put away the money you saved on premiums by switching from a more expensive plan.

More:

Read next: 4 Ways Millennials Have It Worse Than Their Parents

MONEY Health Care

6 Questions to Ask Before You Sign Up for a Health Plan This Year

tweezers and pill
Geir Pettersen—Getty Images

Employers are changing your health insurance options more than ever. Rushing through your open enrollment paperwork could cost you.

You don’t get a pass this year on big health insurance decisions because you’re not shopping in an Affordable Care Act marketplace. Employer medical plans—where most working-age folks get coverage—are changing too.

Rising costs, a looming tax on rich benefit packages, and the idea that people should buy medical treatment the way they shop for cell phones have increased odds that workplace plans will be very different in 2015.

“If there’s any year employees should pay attention to their annual enrollment material, this is probably the year,” says Brian Marcotte, CEO of the National Business Group on Health, which represents large employers.

In other words, don’t blow off the human resources seminars. Ask these questions.

1. Is my doctor still in the network?

Some employers are shifting to plans that look like the HMOs of the 1990s, with limited networks of physicians and hospitals. Provider affiliations change even when companies don’t adopt a “narrow network.”

Insurers publish directories, but the surest way to see if docs or hospitals take your plan is to call and ask.

“People tend to find out the hard way how their health plan works,” says Karen Pollitz, a senior fellow with the Kaiser Family Foundation. “Don’t take for granted that everything will be the same as last year.” (Kaiser Health News is an editorially independent program of the foundation.)

2. Is my employer changing where I get labs and medications?

For expensive treatments—for diseases such as cancer or multiple sclerosis—some companies are hiring preferred vendors. Getting infusions or prescriptions outside this network could cost thousands extra, just as with doctors and hospitals.

3. How will my out-of-pocket costs go up?

It’s probably not a question of if. Shifting medical expense to workers benefits employers because it means they absorb less of a plan’s overall cost increases. By lowering the value of the insurance, it also shields companies from the “Cadillac tax” on high-end coverage that begins in 2018.

Having consumers pay more is also supposed to nudge them to buy thoughtfully—to consider whether procedures are necessary and to find good prices.

“It gets them more engaged in making decisions,” says Dave Osterndorf, a benefits consultant with Towers Watson.

How well this will control total costs is very unclear.

Your company is probably raising deductibles—the amount you pay for care before your insurance kicks in. The average deductible for a single worker rose to $1,217 this year, according to the Kaiser Family Foundation. One large employer in three surveyed by Marcotte’s group planned to offer only high-deductible plans (at least $2,600 for families) in 2015.

Employers are also scrapping co-payments—fixed charges collected during an office or pharmacy visit.

Once you might have made a $20 copay for a $100 prescription, with the insurance company picking up the other $80. Now you might pay the full $100, with the cost applied against your deductible, Marcotte says.

4. How do I compare medical prices and quality?

Companies concede they can’t push workers to shop around without giving information on prices and quality.

Tools to comparison shop are often primitive. But you should take advantage of whatever resources, usually an online app from the insurance company, are available.

5. Can I use tax-free money for out-of-pocket payments?

Workers are familiar with flexible spending accounts (which aren’t that flexible). You contribute pretax dollars and then have to spend them on medical costs before a certain time.

Employers increasingly offer health savings accounts, which have more options. Contribution limits for HSAs are higher. Employers often chip in. There is no deadline to spend the money, and you keep it if you quit the company. So you can let it build up if you stay healthy.

Don’t necessarily think of HSAs as money down the drain, says Osterndorf. Think of them as a different kind of retirement savings plan.

6. How is my prescription plan set up?

Drugs are one of the fastest-rising medical costs. To try to control them, employers are splitting pharma benefits into more layers than ever before. Cost-sharing is lowest for drugs listed in formulary’s bottom tiers–usually cheap generics—and highest for specialty drugs and biologics.

If you’re on a long-term prescription, check how it’s covered so you know how much to put in the savings account to pay for it. Also see if a less-expensive drug will deliver the same benefit.

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.

 

MONEY 401(k)s

Why Millennials Are Flocking to 401(k)s in Record Numbers

hand clicking Apple mouse connected to egg with 401k on it
Jason York—Getty Images

First-time 401(k) plan enrollees are soaring as young workers enter the labor force. This is a positive development. But it won't solve our savings crisis by itself.

Young workers have received the message about long-term financial security—and with increasing assistance from employers they are doing something about it, new research shows.

In the first half of 2014, the number of Millennials enrolling for the first time in a 401(k) plan jumped 55%, according to the Bank of America Merrill Lynch 401(k) Wellness Scorecard. This twice-yearly report examines trends among 2.5 million plan participants with $129 billion of assets under the bank’s care.

The brisk initial enrollment pace is due partly to the sheer number of Millennials entering the workforce. They account for about 25% of workers today, a figure that will shoot to 50% by 2020. But it also reflects a broader trend toward 401(k) enrollment. Across all generations, the number enrolling for the first time jumped 37%, Bank of America found.

One key reason for the surge in 401(k) participation is the use of auto-enrollment by employers, as well as other enhancements. The report found that number of 401(k) plans that both automatically enroll new employees and automatically boost payroll contributions each year grew 19% in the 12 months ended June 30. And nearly all employers (94%) that added automatic enrollment in the first half also added automatic contribution increases, up from 50% the first half of last year.

Enrolling in a 401(k) plan may be the single best financial move a young worker can make. At all age levels, those who participate in a plan have far more savings than those who do not. Another important decision is making the most of the plan—by contributing enough to get the full company match and increasing contributions each year.

Other added plan features include better educational materials and mobile technology. In a sign that workers, especially Millennials, crave easy and relevant information that will help them better manage their money, the bank said participants accessing educational materials via mobile devices soared 41% in the first half of the year.

The number of companies offering advice online, via mobile device or in person rose 6% and participants accessing this advice rose 8%. A third of those are Millennials, which suggests a generation that widely distrusts banks may be coming around to the view that they need guidance—and their parents and peers may not be the best sources of financial advice.

Millennials have largely done well in terms at saving and diversifying. They are counting more on personal saving and less on Social Security than any other generation, the report found. They seem to understand that saving early and letting compound growth do the heavy lifting is a key part of the solution. Despite its flaws, 401(k) plans have become the popular choice for this strategy.

Yet this generation is saddled with debt, mostly from student loans and credit cards, and most likely to tap their 401(k) plan savings early. Millennials are also least likely take advantage of Health Savings Accounts, or HSAs, which allow participants to set aside pre-tax dollars for health care costs. Health savings account usage jumped 33% in the first half, Bank of America found. But just 23% of Millennials have one, versus 39% of Gen X and 38% of Boomers.

Still, the trends are encouraging: employers are making saving easier and workers are signing up. That alone won’t solve the nation’s retirement savings crisis. Individuals need to sock away 10% to 15% of every dime they make. But 401(k)s, which typically offer employer matching contributions, can help. So any movement this direction is welcome news.

Related:

How can I make it easier to save?

How do I make money investing?

Why is a 401(k) such a good deal?

MONEY Ask the Expert

What You Need to Know Before Choosing a Beneficiary for a Health Savings Account

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Robert A. Di Ieso, Jr.

Q: “What happens to the money in a health savings account when the account owner dies?”–James McKay

A: It’s up to you to decide.

But let’s back up a step: A health savings account offers those in high-deductible health insurance plans the opportunity to save pretax dollars and tap them tax-free to pay for qualified medical expenses, with unused funds rolling over from year to year. Unlike a Flexible Spending Account, you have the opportunity to invest the money. And once you hit age 65, the money can be used for any purpose without penalty—though you will pay income tax, similar to a traditional IRA. So for many people, an HSA also functions as a backup retirement account.

When you open an HSA, you will be asked to designate a beneficiary who will receive the account at the time of your death. You can change the beneficiary or beneficiaries any time during your lifetime, though some states require your to have your spouse’s consent.

Your choice of beneficiary makes a big difference in how the account will be treated after you’re gone.

If you name your spouse, the account remains an HSA, and your partner will become the owner. He or she can use the money tax-free to pay for qualified healthcare expenses, even if not enrolled in a high-deductible health plan, says Todd Berkley, president of HSA Consulting Services. Should your spouse be younger than 65, take a distribution of funds and use them for something other than medical expenses, however, he or she will pay a 20% penalty tax on the amount withdrawn plus income taxes (a rule that also applies to you while you’re alive).

Thus, Berkley warns against a spouse taking a full distribution to close the HSA. He says that it’s better to leave money in the account first for medical expenses, then later for retirement expenses both medical and non—since your partner gets the same perk of penalty-free withdrawals for other expenses after turning 65.

When the beneficiary is not your spouse, the HSA ends on the date of your death. Your heir receives a distribution and the fair-market value becomes taxable income to the beneficiary—though the taxable amount can be reduced by any qualified medical expenses incurred by the decreased that are then paid by the beneficiary within a year of the death.

Failure to name a beneficiary at all means the assets in your account will be distributed to your estate and included on your final income tax return.

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