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, including 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 are lost.
- Health Savings Accounts (HSA)HSAs also allow employees to save pre-tax income to cover qualified medical expenses, but unlike FSAs, HSA balances carry 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 health care expenses? An article by Ding and Glied (2024) To find the answer, they used data on health care expenditures of working-age adults from the Medical Expenditure Panel Survey (MEPS) 2011-2019. Their study concluded that:
…families with FSAs spent an average of 20% or $2,033 (95% CI, $789-$3,276) more on health care annually than families without accounts, largely due to increased insurer-paid expenses. Families with HSAs spent an average of 44% or $697 (95% CI, $521-$873) more on out-of-pocket costs and had insignificantly higher insurance-paid expenses than families without accounts, resulting in overall expenditures comparable to those of families without accounts. The additional tax expenditures associated with FSAs averaged $1,306 (95% CI, $536-$2,076) annually per family.
You can read the full article here.
