Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) have been a welcome introduction to the healthcare landscape over the last decade. Consumers love the ability to save money by investing in these plans and thereby avoiding taxes on the amounts they contribute, but do you know the differences between each type of plan, and the details of how each one works?
You are, for the most part, not able to contribute to an HSA and an FSA in the same year and your employer will likely only offer one of these options to you, so even if you prefer the other type of plan, you will be at the mercy of your employer’s options. One exception in which you may be able to contribute to both types of plans in the same year is if your employer offers a special type of FSA that covers a very select service or group of services. For instance, it may cover vision or dental coverage only, and in that case you would be able to contribute to both that the unique FSA and an HSA.
If you do need to make a choice between the two, then it is important to understand the differences between them so that you can select the type that best suits the needs of you and your family.
One important difference is in how much money you can roll over from year to year. After all, no one wants to lose money they worked hard to earn. In the case of an FSA, you can roll $500 from one year to the next, according to IRS guidelines. An HSA offers even more safety though, as the entire amount you’ve left unspent rolls over to the next year. Being able to carry more money forward is certainly an appealing aspect of HSAs.
However, consider that you can only get an HSA if you are opted into a high deductible healthcare plan. You may also need to pay your entire deductible before you can access any funds from your HSA. So, if you are considering an HSA over an FSA, think carefully about whether you can take on the expense of high deductibles, and whether you are even likely to meet your deductible for the year at all. Those considerations might make an FSA seem more appealing.
In terms of withdrawing money, neither has a clear advantage over the other. Withdrawals can be made from FSAs and HSAs, and many plans now provide a debit card that can be used to make a withdrawal a very simple process. These debit cards have made it significantly easier to have accessibility to the funds you have allocated.
Another key difference between these two types of plans is that with an HSA, you can alter the amount you are contributing at any time during the year. However, with an FSA, you may determine the amount you are electing only during open enrollment. You will then be locked into that contribution amount until the next open enrollment period.
Both types of accounts allow you to contribute to them on a pre-tax basis, you should know though, that a HSA will require you to submit information on it when filling out your taxes each year, whereas an FSA does not.
HSAs and FSAs can be used for different purposes. According to Healthcare.gov, FSAs can be used to purchase the following items:
- copays on doctor’s office visits
- certain drugs and medications
- your deductible
- various health care costs
Those health care costs can be even be stretched a bit from obvious health-related expenses like medical treatment to something like new sunglasses assuming they offer some sort of UV protection for your eyes.
HSAs on the other hand can only be used on items that are listed on an IRS-approved list found here. So you may find that you like the flexibility of an FSA in this regard.
Contribution limits serve as another differentiator between the two types of plans. The IRS sets limits on how much can be contributed to HSAs and FSA. In 2017, the limit for FSAs was $2,700, and the limit for HSAs was $6,750 for a family and $3,40 for an individual.
When considering the costs associated with HSAs and FSAs, you should also think about the type of insurance you have as well. With a PPO, for instance, you can enjoy significant discounts on healthcare needs as a perk of signing up for the program. A simple doctor’s office could cost less than half of its normal cost with a PPO plan. If you have a more significant health issue, you could use an FSA or HSA to cover the cost of the hospital room and board, although this is another area where a PPO may offer discounted pricing that will prove beneficial. If you do find yourself needing to stay in a hospital, you may want to request a private room. This not only offers the advantage of increased privacy for yourself and family members visiting you, but it also reduces your exposure to infectious illnesses you could be exposed to if you share a room with other patients. However the cost of this type of room is high, ranging from several hundred dollars to thousands of dollars, and not every type of health plan will cover it. This is an eligible expense with most HSAs and FSAs, though not with Limited Care FSAs or Dependent Care FSAs.
The introduction of HSAs and FSAs as healthcare options has given individuals and families another option to customized their healthcare plans to their own needs and budgets. Carefully consider the nuances of each plan type when making your choice.