Recently the topic of health savings accounts (HSA) and flexible spending accounts (FSA) has become the center of discussion in my office. Several clients who are employed by the local municipality were encouraged to open FSAs with their employer and others were concerned about protection of their HSAs in a bankruptcy case.
What’s the difference?
A Health Savings Account is most like an IRA. That well-known investment tool allows you to deposit money into the account before you pay taxes on the money. The taxes are paid when you withdraw the money from your IRA. A HSA does much the same. You deposit money into the account where it can grow and you withdraw money from it to pay for non-insured medical expenses. The difference is that as you withdraw the money for medical expenses, it remains tax-free. There are requirements such as a high-deductible medical insurance policy (which also can save you money) and a limit to the amount deposited into the account each year ($2,900 for an individual).
A Flexible Spending Account also allows you to deposit money into savings pre-tax, but the money remains with your employer. All withdrawals from the account have to be for pre-approved medical expenses. However, a FSA can also be used for day-care expenses as well as medical expenses not covered by insurance. The downside is that the money left in the account is lost to the employer at the end of the year if you don’t use it all. So you must accurately predict how much money you will use during the year to avoid losing it.
Whether these accounts are exempt in a bankruptcy case may well depend on your state’s laws on bankruptcy exemptions. Progressive states like Florida and Texas specifically mention such accounts as exempt while other states like Idaho do not.
