Saving in a cafeteria plan

Healthcare doesn’t come cheap, and a lack of proper preparation for healthcare expenses can put a lot of households into situations they didn’t ever want to endure: mounting bills, collection agencies, and sometimes bankruptcy. Having a savings safety net is more important than ever, as medical costs continue to climb and deductibles go up right along with them.

One way to establish a safety net for yourself is to sign up for your company’s cafeteria plans to put money aside for healthcare expenses. That’s right: One of the best ways to save on healthcare is to literally save. We’re breaking down the different types of cafeteria plan accounts that may be available to give you some helpful insight into which of these tax-advantaged plans might be right for you.

Health savings accounts (HSAs)

If your health insurance is deemed a high-deductible health plan (HDHP) per IRS guidelines — and you don’t have any secondary coverages — you’re eligible to contribute to a health savings account (HSA). An HSA is a great way to build a medical nest egg while also saving on your taxes.

HSAs are unique in the sense that they offer triple tax savings to account holders. The money going in isn’t taxed when done via payroll deduction, you can invest* the money in the account and grow it tax-free, and when spent on qualified medical expenses, the money isn’t taxed when it comes out.

HSA money has no deadlines on it, either. You can stow away funds in the account and save them up for when healthcare needs arise down the road. HSAs are becoming a popular retirement savings vehicle for this very reason. Since healthcare in retirement can be expensive, having money in an HSA can really help retirees who are often on a fixed income.

Maxing out your HSA every year is considered a wise money move. Check out our HSA contribution limits page for more information on how much you’re eligible to contribute.

Limited-purpose flexible spending account (LPFSA)

A limited-purpose flexible spending account, or LPFSA, is a great plan to pair with your HSA to max out your pre-tax healthcare savings. LPFSA funds can be spent on dental or vision expenses for the plan year and are typically front-loaded — meaning employers put all the money in the account at the beginning of the year so you can use them as needed throughout the year.

The LPFSA is one of the most restrictive accounts for health savings, however, and you need to have spent it all by the end of the plan year or you lose it. It takes planning to make sure you’ve used your LPFSA money, but if you need new glasses or have a child needing orthodontic care, they’re great to have.

Note that anything you take out of your LPSFA needs to be documented, so you’ll need to make sure you get itemized receipts for any dental or vision care you receive and get that documentation to your FSA administrator. We have a page devoted to LPFSAs you should check out if you want to know more.

Flexible spending account

If your health insurance plan doesn’t qualify as an HDHP, you’re not eligible for an HSA. But fear not: You’re likely eligible for a flexible spending account (FSA).

Don’t let the name fool you, though; an FSA isn’t as flexible as it sounds. You do get double tax benefits like the HSA, with pre-tax money going in and no tax on the money coming out. You must, however, show proper documentation whenever you use the account.

Just like the LPFSA, all the money must be spent in the account by the end of the plan year, and the dates of care must fall within the plan year. It’s important to use those funds because they came out of your paycheck, and if not used in full, you’ll lose them when they’re forfeited back to the plan. With proper planning, an FSA can be a great way to pay for expenses you know you’ll be incurring in the coming year.

Check out our page about FSAs here for more information.

More ways to save

This blog is part two of a three-part series on saving on healthcare expenses. Check out Part 1: Choosing the right healthcare coverage and Part 3: Even more ways to save on healthcare.