How To Decide Between an FSA and an HSA
When you review your employee benefits as you start a new job, or during open enrollment each year, it’s all kind of an alphabet soup — 401(k), HSA, PTO, WFH, FSA. And it’s worth taking your time to decipher the code and figure out what it all means.
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Two of them – FSA and HSA – fall under the category of medical benefits, and they help you to both lower your tax bill and put cash aside to pay for your healthcare. The acronyms stand for Flexible Spending Account and Health Savings Account, and you’re eligible to sign up for one – but not both – through most employers.
How do you know which is right for you? GOBankingRates asked the experts to weigh in about factors to consider.
FSA vs. HSA: An Overview
Both an FSA and HSA allow you to put money away for medical expenses on a pre-tax basis. If you contribute $2,000 annually to either account, for example, you won’t pay income tax on that contribution. But the two are vastly different from this point.
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With an FSA, your maximum contribution for 2022 is $2,750. You can spend that money on any qualifying medical expense not covered by your insurance, such as co-payments or prescriptions. Contributions come through payroll deductions, and you can spend up to the maximum you have pre-selected right away, as long your planned contributions throughout the year will cover the expenditure.
It’s important to know that your FSA account is “use it or lose it.” You won’t be able to access any remaining funds not spent by the end of the year, or at the end of a grace period, if there is one.
To sign up for an HSA, you also must be enrolled in a high-deductible health plan. The annual contribution limit is $3,650 for an individual or $7,300 per family. Unused funds will roll over from year to year. Unlike an FSA, you can’t spend the money until it has been put in your account, but you may keep your receipts and seek reimbursement once your balance covers the bill. If you’re young, have few medical bills and don’t need to tap into your HSA on a regular basis, the money will be there to pay healthcare expenses when you’re older.
While HSA account holders can’t have a traditional FSA simultaneously, they can sign up for a limited FSA to cover dental and vision expenses and also a dependent-care FSA for child-care costs.
How do you know which to choose?
“The decision becomes more complex if your employer offers both an HSA and an FSA,” said R.J. Weiss, a certified financial planner and founder of The Ways to Wealth. “What’s important to understand is that HSAs are only available for plans with high-deductible health plans. FSAs, on the other hand, are typically a benefit attached to health plans with lower deductibles and richer benefits.
“When making the decision, the first and most important aspect is choosing the right health plan. While HSAs have advantages like investing the money you don’t spend and having the funds roll over yearly, the better decision comes down to which health plan will save you more money this year.”
The Determining Factors
What should you consider when both options are available to you?
Your Work Status
“An FSA account is owned by your employer or an entity you may be working for, while in a HSA account you are the account owner. So, if you are self-employed, you might be limited to a HSA account,” said Bill Ryze, a chartered financial consultant and board advisor with Fiona.
If you quit your job, retire or are laid off, the remaining funds in your FSA stay with your employer, unless you choose COBRA coverage.
Age and Frequency of Medical Care
“Do you have a medical condition that needs you to seek frequent healthcare, or do you rarely visit the hospital?” Ryze asked. “HSA is best if you don’t have frequent healthcare needs and is therefore better for young people. You should consider an FSA if you need frequent medical care — e.g., if you suffer a chronic illness or are a senior citizen, since you might need more medical care.”
Michael Collins, a professor at Endicott College in Massachusetts and the founder and CEO of WinCap Financial, said future medical needs play a big factor in the decision.
“If you are planning on having a family or incurring significant medical expenses in the future, an HSA may be a better option,” Collins said. “However, if you are not expecting any major medical expenses in the future, an FSA may be a better option, as you can use the funds for current expenses.”
Ability To Save
Financial experts see the benefits of both accounts, but especially the HSA, if you qualify.
“An HSA allows you to not only put aside money for medical expenses, but you can also invest that money and allow it to grow,” said Jay Zigmont, a certified financial planner and founder of Childfree Wealth. “An HSA is a rare ‘triple tax benefit’: You get a tax break for putting money in, it grows tax-free, and it comes out tax-free for medical expenses. Unlike an FSA, you can keep the account until you need it, and for many, they save the money until retirement.”
Remember that FSA benefits are “use it or lose it,” but you can keep your HSA funds until you need them.
“With an HSA, all remaining funds carry over each year,” said Rhett Stubbendeck, the CEO of LeverageRx. “Furthermore, if you leave a company, your FSA dollars may not be returned, However, if you have HSA, all the funds in it are yours to keep.”
How much you can afford to put into health savings also factors into your decision.
“You need to consider your budget,” Collins said. “An HSA requires you to contribute funds on a regular basis, so you need to make sure you can afford the contributions. An FSA does not require regular ongoing contributions, so you may have more flexibility with your budget.”
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