Who Can Use Health Savings Accounts and Flexible Spending Arrangements

How you save: “The funds are triple tax-free,” says Dan Perrin, president of the HSA Coalition in Washington, D.C., and the author of HSA Road Rules. You save three times over since taxes aren't taken out of the money you put in, interest earned by money in your account is tax-deferred, and no taxes are owed when you withdraw the funds to pay for qualifying medical expenses.

HSAs most clearly benefit either very healthy people or people with chronic illness. The high deductible health plans that an HSA must be paired with usually have lower premiums than traditional ones, so if you are young and healthy and don’t incur many medical expenses, you can save with the lower premiums. And any money you put into your HSA that is not used can be considered part of your savings. HSAs are often compared with IRAs because the more money you leave untouched in your HSA, the more money will accumulate in your account that you can then use for the greater health-care expenses that will likely come in your retirement years.

You can still save with an HSA even if you have high medical expenses and you need to use the funds. Perrin points out that, with an HDHP, once you’ve met your deductible, the plan covers 100% of in-network health expenses, whereas some traditional health-insurance plans only pay 80% of your in-network medical costs. The remaining 20%, plus deductibles and co-pays, can add up to more than you’d pay with an HSA and high-deductible plan if you have a chronic or catastrophic health problem—for instance, if you have type 2 diabetes or are diagnosed with breast cancer and require chemotherapy and surgery.

Bottom line: If you are young and healthy or do not have access to an employer-paid plan, in all likelihood an HSA is a good idea. It also may be recommended if you have a chronic or serious medical condition and an insurance plan that does not cover 100% of your expenses. If you can afford health insurance now, you can afford to refinance your account, advises Perrin, who adds that he would recommend an HSA for anyone who feels comfortable being in charge of his or her own health care—that is, deciding what to spend your money on without the help of an insurance program.