Category: insurance

Paying for Health Care: The FSA & HSA

Paying for Health Care: The FSA & HSA

For the past several months, my life has been consumed with my health. I was informed in June that I would probably need surgery on my leg for an injury I incurred in May. An MRI confirmed that result in late August. I received a cortisone shot and was able to schedule my surgery in December to align with the school winter break. This has been a lot, physically, to handle. But healthcare and finance are very much intertwined, and one of my favorite financial tools is the health care account I have through work called the FSA (Flexible Spending Account). Other people will have access to a similar account called the HSA (Health Savings Account). Both are tax-advantaged accounts for paying for most things medical and I think everyone should have one if they can.

I have been very fortunate to always have health insurance. Strike that, great health insurance. My parents both worked union jobs and I work a union job now. I have never been without insurance coverage. As such, I never knew much about health insurance or paying for medical care until this past year when I knew I’d be looking at several on-going expenses even with my good health insurance. I learned from a friend at work that our employer offers an FSA which is a separate account one can use to pay for out-of-pocket medical care. I was able to learn about this in time to establish one during the November open enrollment period and it became available to me January 1, shortly after my surgery.

Even with good health insurance, everyone has some medical care costs throughout the year. Back when I started my job, we sat in a presentation during which we were basically told not to bother with an FSA because if you don’t spend the money, it will disappear. The presenter in essence told us the FSA was not worth it. This was about the worst financial advice anyone has ever given me.

Double Tax Advantage of Health Accounts

Let’s take a step back and determine how an FSA or an HSA benefit you in your daily life. These are accounts set up through your employer to help you pay for health care. They are awesome because they use pre-tax dollars. What this means for you: say you have a $20 prescription cost. Just paying for it, how I did for years, from your checking account, means you pay with after tax dollars. That means I’d need to earn $23.25 at work to be able to have $20 to spend from my checking account. This is because I have about a 14% effective tax rate (all of my local, state, federal, and Medicare taxes divided by my gross income). If you have a higher effective tax rate, like 25%, you’d need to earn $26.66 at work to be able to pay for that $20 prescription. If you use your health account, you only need to earn $20 at work to pay that $20 bill. You might be thinking 3 bucks, 6 bucks, who cares? Well, first off, that’s just nonsense. Any money you save, even a dollar, is a benefit to you. But expand this out to a year: say you pay $20 a month for a prescription, that’s $240 for a year. You could pay with a health account exactly $240 from your gross income, or you could pay with after tax dollars, requiring you to earn $279.07 if you have my 14% tax rate. Now you just saved yourself almost 40 bucks on just that prescription alone. That’s just one example.

The health accounts can be used to pay for prescriptions, contacts, and office visit co-pays. These are the top three expenses they help with, in my opinion, but check your HR guide for the extensive list of every expense you can use the account on. If you’re like me and visit the doctor all the time, co-pays can add up. Every time I go to the physical therapist, I have to pay $15. To visit the surgeon, it’s $25. I know people have co-pays ranging from $10 to $30, and these have to be paid for each visit no matter how many times you visit them. Everyone has some medical costs throughout the year and being able to use pre-tax dollars in one of the health accounts is an invaluable financial tool.

In an earlier article, I showed how contributing to a 401(k), IRA, or 457 account can lower your tax liability. The FSA/HSA do the same thing. But the health accounts can be used today to pay for your daily medical expenses. Say you contribute $500 to your health account, that means your taxable income will be lowered by $500. If you’re in the 12% tax bracket, that means you lower your federal tax bill by about $60. My Ohio state tax bill would go down about $15. This is the double benefit of the health accounts. First, you get to pay for your medical expenses with pre-tax money. Second, you get to pay less in taxes. For me, $500 in that account first saves me $81.39: if I had to pay $500 in after tax dollars, I’d need to earn $581.39 to get $500 deposited in my checking account. Then, $500 comes off my taxable income taking me from about $40,665 to $40,165, which saves me $60 in federal taxes and $15 in state taxes. I’ll take that total of $156.39 in savings!

FSA vs. HSA – Contributions and Rollover Limits

You are able to contribute more to the health accounts to further lower your taxable income, but that is where the difference between the FSA and HSA become very important. Let’s revisit what that presenter told me during my first week as a fully employed adult: don’t do an FSA because you can lose the money. This is 100% true. If you do not spend the money you contribute to an FSA throughout the year, it will disappear, not roll over. Contributions to an HSA roll over from year to year. You need to know if you have an FSA or an HSA so you can determine your contributions. In some cases, $500 of an FSA will roll over, but check with your HR department to know if you have that option.

  • While the maximum you can contribute to an FSA in 2018 is $2650, you don’t want contribute that much if you aren’t certain you’ll spend all of it. I looked at my co-pay costs from past years and asked my doctors how many visits I should expect post-op and figured $550 to be an appropriate level to contribute. If I don’t spend it all on post-surgery care, I know I can use the account to buy contact lenses, which I do wear regularly.
  • The maximum you can contribute to an HSA in 2018 is $3450 and if you can, you should contribute the maximum, since it rolls over. This allows you to save for potential future health costs, whether unforeseen emergencies or you just want to save for potential costs that come with age.


FSA vs. HSA – Type of Health Insurance Coverage

The biggest difference determining which account you’ll have access to is what type of health insurance you have. The HSA is only available to people enrolled in a HDHP (High Deductible Health Plan). The IRS defines high deductible as $1350 or more for a single person or $2700 for a family. This means that if you are required to pay $1350 before your insurance starts to pay for your health care, then you can have an HSA. The HSA allows you to pay your deductible with pre-tax dollars. High deductible plans, in theory, mean a lower premium (the amount you pay every month just for having health insurance). You are able to contribute 2.5 times the deductible. You’d probably want to contribute at least the amount of your deductible to the account so you have it ready to go if you need to pay it.

An FSA can be offered to people with other insurance – the not high deductible plans. My deductible is $0. We just have to pay co-pays for most office visits.


Additional Benefit of the HSA

There is a third tax advantage of the HSA. An HSA is very similar to a 401(k) retirement account because you can actually invest the money and it will collect interest. You will not have to pay tax on the growth your HSA account accumulates. While you are young and in your 20s it would be an excellent idea to invest your HSA money in stocks that will grow a lot, so that you have even more money available to you when you reach an age when you’ll pay more for health care.

This option isn’t available for an FSA because it doesn’t have the yearly roll over.


Always have an FSA or HSA

Even in future years when I won’t be paying for weekly office visits and regular prescriptions, I plan to always contribute a little bit to my FSA since it is a double tax advantage. Contact lenses alone can cost $200. I’ll probably maintain $200 to $500 in contributions in future years. I also like the psychological support the FSA gives since I have a completely separate account for medical expenses. I don’t have to think about whether paying for my co-pay means less fun spending that month. The money is already set aside and accounted for. There really is no reason not to hold one of these health accounts if you have the opportunity for it. If you have children, these accounts are going to be gold-mines since kiddos always have to go the doctor.

We never know how health care cost and insurance coverage is going to change given it is heavily tied to our political climate. The best thing you can do for your personal situation is just be prepared and use the tools available to you. That’s why if you have access to the HSA, you should build up the account for your own personal insurance plan and make it ready for a long time horizon. They don’t expire so you can have hundreds of thousands of dollars in your 50s when costs start to rise.

but I thought teachers were poor

but I thought teachers were poor

Students ask me this every so often. Once I heard a student say that teachers make $9000 a year. This tells me that we teachers have got to stop complaining! Yes, I have friends who make more money than I do even though we have the same level of education. But I am not, by any means, poor! And neither are you, other teacher reading this. There certainly is some level of sacrifice to take a job as a public servant. But there are great benefits. I am not talking about the privilege to serve. I am talking about literal benefits: retirement, insurance, sick days, holidays. I’m not here to talk about how it’d be wonderful if our society valued educators more and we should get paid for. That’d be just fabulous but I am not living in a dream world. Working as a teacher or in some other government position can be wildly fulfilling but it’s also going to pay the bills just fine. Many of these benefits are similar for other government employees, but may have different names or criteria.

Benefit 01: STRS – the State Teacher Retirement System

This is the name of the pension fund in Ohio for public school teachers. It is arguably the best benefit of teaching. You can work a career as a teacher and live an amazingly comfortable life in retirement. Here’s how it works. We contribute 14% of our gross income automatically. This is not something we elect. If you want to teach in Ohio, you will contribute 14%. It seems very high, but it’s a great forced savings rate. My district in Cleveland also contributes 14% for each employee. So 28% of my income is being deposited in my name for future use! That is far better than most of my friends in private industry getting a 5% 401(k) match, if they’re lucky. There are some employers matching only 2% of gross income. The difference is that we do not actually see our employer’s contributions until it is time to retire. We also do not pay into social security. Note that not every state is as high as Ohio’s. Georgia, for example, has only a 6% contribution.

There are two plans that you can elect when you first become a teacher in Ohio: the defined benefit plan and the defined contribution plan. The defined benefit plan is what is most common. I have no data on it, but everyone I know has chosen the defined benefit plan. I chose the defined benefit plan because my cousin chose the defined benefit plan. And as far as I know, it’s not alterable. What this means though, is that it is clearly defined what your benefit will be upon retirement. It follows a very simple formula, so long as you meet the criteria.

First, in order to retire with full benefits, one must work at least 35 years and be 60 years old. If you start teaching at age 22, then, you have to really work 38 years, because you can’t retire before 60 years old without penalty (granted you could find other creative ways to stop working). Or, you can be 65 years old and have worked at least 5 years.

Second, your benefit is calculated based on the number of years you served and your Final Average Salary (FAS). The FAS is average of your highest five years. The formula for retirement benefit will be

2.2% x years x FAS

So if you teach for five years and the average of those years is $52,000 (approximately what mine will be for these first five years), the benefit would be

11% x $52,000 = $5,720 each year

so long as you wait until you are 65 to apply for the benefit. That comes out to be about $467.67 per month. Now, say you teach those full 35 years and your best five years average out to be $85,000. Your benefit would be

77% x $85,000 = $65,450 each year

so long as you are at least 60 years old when you apply for the benefit. That comes out to be about $5454.17 per month. There’s your incentive to teach your whole career!  Consider that you could live another 30 years after you retire; the benefit paid to you totals $1,963,500. Reach a higher FAS, and you’ll be paid $2 million in benefits. That is amazing.

Benefit 02: Health Insurance

Up until about 6 months ago, I knew nothing about insurance, except that I’ve spent my whole life having “good” insurance. My parents both had union jobs at auto factories, so we had good insurance from Anthem Blue Cross Blue Shield. I never went without medical care or medicine, though I have been fortunate enough to never have a great need for it. Having good insurance was just something I accepted because other people said it. But now, I have an injury that requires surgery and intensive physical therapy that I’ll be starting soon. I had to learn about insurance finally.

The first part of this is that teachers have very affordable premiums. The premium is the amount we pay to have insurance. While each district will have a different program and provider, premiums will be incredibly affordable. For a single person, it costs $45 each pay check, for 10 months. So, $900 a year to pay for health insurance. Some people are paying close to that per month! Health insurance is certainly a political debate in our country, but you will have access to a great program if you work as a public school teacher, especially in a larger district.

The next part would be deductible. The deductible in an insurance plan is the part the person has to pay before the insurance will pay. For example, if you have a $1500 deductible, you must pay from your own pocket $1500 before the insurance starts paying for any of your medical care. You could have to pay this all at once for a major expense such as an emergency room visit. Or you could have to pay it throughout the year on various office visits. In either case, until you have shelled out $1500, the insurance isn’t going to pay anything. My plan through Medical Mutual of Ohio has a $0 deductible for in-network services. The only thing I have to pay is the co-pay. That’s the amount you pay at the office when the secretary politely asks you “do you know what your co-pay is?” It’s usually a low amount. For us, it is $15 for a regular physician, $25 for a specialist, $75 for emergency room, $35 for urgent care, and $0 for preventative care. The Cleveland Clinic is in my network, so I have to pay only $15 – $25 for some of the best care in the world. You can pay for these items with pre-tax dollars by opening a health savings accounts (HSA) or a flexible spending account (FSA). My district offers only an FSA. This incredibly low cost for health care is my regular incentive to work as a teacher.

This year alone I have gone to 3 specialists, a physical therapist, had x-rays, an MRI, done preventative testing and blood work, had stitches and have still only paid a total of about $1300 for my care. When I started learning the value of my insurance, I started to appreciate my profession a lot more. Learn what your health plan offers and really quantify it to know what it’s worth. Appreciate this benefit for all it is.

Benefit 03: Time off

Obviously, we get the summers off! Please don’t troll me and tell me that teachers only work 9 months a year and so we should get paid less. Most teachers are still going to be averaging 50-55 hours a week which still yields about 2000 hours over 37 weeks. A person working 40 hours over 50 weeks totals the same amount. I actually work at an extended school year building, so I work 2 extra weeks, making my summer even shorter. However, the time off in the summer offers freedom to do so much! Time with family, time traveling, time learning, time reading, time at the pool. Yes, you still need to plan the curriculum for the upcoming year, but you get to do it on your own time. You get some time to breathe and to reset. You find new perspective which makes you work more efficiently in the coming year. Already, after just two full years working, the summer is so key to my essence as a teacher. I love, love love, to sleep in. Sometimes that really just means sleeping until 8 o’clock. But having the freedom for two months to not set an alarm is terribly liberating.

We also automatically get all major US holidays off. In my district, we get 2 full weeks off at Christmas time and a week somewhere near Easter. We don’t have to “take time off” to go on a vacation or just have time with our families. And that is fantastic. Appreciate this. Your friends working else where probably get 2 days off at Christmas and have to “take off” any more they want to travel to their families.

Sick days are the last wonderful time based benefit I want to talk about. Each year, I can accumulate 14 sick days and 3 special privilege days, which roll into sick days if left un-used. While no teacher likes to leave their kids alone with a sub, it is comforting to know that there is no risk of penalty, formal or informal, from my employer for calling in sick… ever. These days roll over year after year. For most women in the profession, the early accumulation of sick days is saved up for maternity leave. Men do of course get to keep theirs and get a better pay out at the end of their career. Special privilege days are called “personal days” in other settings. They’re supposed to be used for additional holidays, funerals, graduation, and other important days needed when one is not actually sick. Essentially we have 17 days available to us, if needed, out of 190 work days (185 school days plus 5 teacher days). That’s almost 9% of the year we can not be there, but still get paid. For us, there are of course 10 additional work days, but people are rarely sick at the start and end of the year.

So what if you get so sick that you use up all of your days? In most districts, there is a donation pool. That means you can donate days to someone who doesn’t have any. There are legitimate reasons to have used up all your sick days, such as a long term illness. When you have a colleague diagnosed with cancer, donating a few days to them is a great way to use that abundance of days.

Benefit 04: Supplemental Retirement Accounts

Teachers already have a great pension fund, why bother with any thing else? Well, there are a variety of mathematical arguments for having a supplemental retirement account. I won’t dive into them now. Just know they boil down to having more security later in life. Money is about gaining freedom, not buying stuff. There is of course the tiny, slim chance, the teacher pension fund would totally implode, but let’s just hope that doesn’t happen.

Supplement 01: the 403(b). The 403(b) is the non-profit equivalent to a 401(k). It has all the same rules. It is a pre-tax account with a maximum contribution per year of $18,000 for a single, young person. So just like your STRS retirement contribution, the money is taken out of your gross income before any taxes are calculated. You’ll want to investigate the fees and portfolio offerings of the company partnered with your school district. In Cleveland, there are actually several companies available to us, but my friends and I all use AXA-equitable. I contribute $100 per paycheck.

Supplement 02: the 457(b). The 457(b) is called a deferred compensation plan and is available to government employees. It is incredibly similar to the 403(b); $18,000 maximum contribution and it’s pre-tax. BUT. And this is the key… But you can access the money as soon as you separate from your employer. You do NOT have to wait until you separate by retirement to access the funds. That is where “deferred compensation” comes from. This means you can have full access to the money if you quit your job. All you have to do is pay tax on it. I just opened mine about a week ago, so haven’t contributed anything just yet. I only found out about the 457 about a month ago and thought we did not have access to it, since no one ever mentioned it at work. It’s posted as a small page, plain as day on my district website.

You can use both of these accounts. Theoretically speaking, you could contribute a total of 36,000 pre-tax dollars to these two funds. For me, that is absolutely impossible at this time. But if someone had a side hustle and an income in the $70-75k range, they probably could fully fund both accounts.

So, teachers, you have 4 amazing benefits that other American workers do not have access to. Be happy about that! Enjoy the benefits of being a teacher right along with the joys of being a teacher.

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“The price of anything is the amount of life you exchange for it.”

-Henry David Thoreau

“It’s not about how much you make; it’s about how much you save”

-millionaire grandma