Even if you have insurance, health expenses can surprise you. Last year I used my vision insurance to visit the eye doctor for new contacts and glasses. I went in accustomed to paying around $200 a year for those expenses. I left with a $900 charge on my credit card (partly due to error and party because I switched to the “Rolls Royce” of contact lenses.) I checked the receipt and got a refund for the error, then sorted out coverage with my insurer for another part, but it still cost in the range of $500. Then I went to the dentist and learned I needed a crown. Fortunately, my dental insurance covered nearly 100% of the cost rather than the 50% they said they cover, so the two expenses balanced out somewhat.

Still, if I’d planned ahead, neither expense would have been a shock to my budget. I don’t have access to a Health Savings Account (HSA) or a Flexible Savings Account (FSA), but that doesn’t mean I can’t plan ahead for medical and health expenses. If you do have access to either of those accounts, then you have several options when it comes to saving for health expenses.

Health Savings Account
The HSA is relatively new. It was introduced in 2004, and some employers offer them along with high deductible health plans. The idea is that you use the HSA to pay for qualified health expenses until the deductible is spent, at which point insurance kicks in. In 2008, you can contribute up to $2800 for a single person and $5900 for a family. Contributions come from pre-tax dollars, which reduces your tax base, and employers can also contribute. The downside is that you can’t withdraw the money for non-medical expenses without paying taxes and a 10% penalty (unless you’re over 65, in which case you only pay taxes.)

Most medical expenses qualify, but not all. You can use the funds to cover:

  • Co-pays
  • Deductibles
  • Prescriptions
  • Over-the-counter medications for defined conditions (like allergies)
  • Glasses
  • Hearing aids
  • Dental expenses
  • Vision expenses
  • Transportation related to medical care

You don’t have to pay the funds directly to someone, but can use it to reimburse yourself for the expenses. You do have to keep receipts to document the expenses, though. You can use the funds to pay expenses even for spouses and dependents who aren’t covered by your high-deductible health plan, but you can’t use it to pay their premiums.

The nice thing about the savings account is that you don’t lose it if you don’t use it. You can roll it over when you change jobs. If you die, it transfers to a beneficiary with no limits on how he or she can spend it.

Flexible Spending Accounts
Many employers offer FSAs. These are also funded with pre-tax dollars, up to a cap of $5000, and are used for similar expenses as the HSA. The trick is that you do lose the funds if you don’t use them by the end of the plan year. Also, if you change jobs, you can only use it for expenses incurred while you were covered by the plan. On the other hand, all funds are available on day one of the plan year, even if you contribute to it with funds from each paycheck. If you plan to switch jobs, get your expensive medical treatments before you leave the plan so you can spend down the money.

Personal Savings Account
If you’re like me and don’t have one of those plans available, you can create your own account to cover health expenses. It won’t reduce your tax base or use pre-tax dollars, but it will collect interest if placed in a high-interest-rate savings account. Simply visit a bank, or online bank, that offers no-fee savings accounts and set up direct transfers from your checking account every month. Then when you have health expenses, reimburse yourself from the savings account. If you don’t spend it, you’ll still have the savings.

This is especially helpful for people with individual health insurance instead of an employer-provided plan. Rather than spending an extra $200 a month to reduce your deductible by $1500, put that $200 a month into the savings account. Then if you need it, you can pay towards your deductible, if you don’t, you still have the money.

Determining How Much to Contribute
Before you contribute to any account, figure out how much you usually spend on health expenses. Get out your receipts for last year and total up how much you spent on co-pays, deductibles, emergency room visits, lab fees, dental costs, eye exams, glasses, the chiropractor, prescriptions, and over-the-counter treatments for colds, allergies, and other defined conditions. That’s approximately how much you should contribute to your savings account or spending account. You may want to add a small cushion, especially if you have young children. Add more if you’re pregnant or have an ongoing condition that may require additional treatment.

Regardless of which plan you choose, it’s a good way to cover health expenses without going into debt or running up credit card interest for unexpected costs.

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