FSA vs. HSA: Which Is Right for You?
In our previous blog we explored what a Health Savings Account is and its many benefits that make it a desirable savings vehicle for medical care. But an HSA isn’t the only option when it comes to tax advantaged medical savings accounts. It’s time to talk about another option; a Flexible Savings Account (FSA).
What is a Flexible Savings Account?
A Flexible Savings Account (FSA) is a healthcare fund used to set aside pre-taxed dollars for out of pocket healthcare expenses. The account allows you to save for any IRS qualified medical expenses including copays, deductibles, coinsurance, therapy and more.
It’s important to know that although you don’t need to obtain coverage under a health insurance policy to be eligible to open an FSA, your FSA funds are not a substitute for health insurance, rather a savings tool to help pay for medical expenses.
How are FSA and HSA’s similar?
Both FSA and HSA are tax-advantaged accounts specifically for out of pocket healthcare expenses. All funds invested in either account grow tax-free and the contributions to the account are made using pre-tax dollars. Also, any withdrawals from the account are tax-free, so long as the money is used for qualifying medical expenses. This triple tax advantage is what makes this savings account especially popular.
How are they different?
An FSA is similar to an HSA, but there are some important differences. The main difference is that self-employed individuals are not eligible to open an FSA. Also, unlike an HSA that can only be used in conjunction with a High Deductible Health Plan (HDHP), an FSA can usually be used with most types of health plans including HMO, PPO, etc.
Another important difference is that any unused balance in an FSA is usually lost by the end of the year. With an FSA, you are required to declare the amount you would like your employer to deduct from your gross income in order to fund the account every year. Once your decision is final, there’s usually no option to change it. The amount you’ve declared needs to be spent within the tax year, or else the money you contributed can be lost if not spent by the deadline.
The biggest benefit of the FSA is that withdrawals can be used towards childcare expenses as well as medical expenses.
HSA vs. FSA
The following chart further examines the key differences between Health Saving Accounts and Flexible Savings Accounts.
Health Savings Account (HSA)
Flexible Savings Account (FSA)
Who is eligible?
Must have a High Deductible Health Plan (HDHP)
Employers need to offer this option
Self-employed are not eligible
What is the contribution limit?
Maximum contribution amounts for 2020 are $3,550 for self-only and $7,100 for families. The annual “catchup” contribution amount for those 55 and older is $1,000.
Maximum contributions for 2020 are $2,750 per individual.
*If employer provides FSA contributions, this amount is in addition to the amount that employees can elect.
Do the funds roll over?
Yes. Unused funds roll over into the following year
Unfortunately, unused funds are lost (unless your employer offers a rollover)
Can the money grow?
Yes. Funds can be invested, and all growth is tax-free.
What happens when you change jobs?
Employee keeps account regardless of job change
Usually you’ll forfeit your FSA with a job change
How does Interest work?
Any interest earned is tax-free
The account does not earn any interest
How do taxes work?
There are no taxes (unless you use funds for unqualified expenses).
Contributions and distributions are both tax free.
Can you change contributions?
Yes. Employee can change the contribution amount during the year
Nope. Employee cannot change the declared contribution amount at the beginning of the year
Which one’s right for you?
Both these accounts are great savings vehicles for a wide variety of qualified medical expenses. And although the roll over benefit might make HSA’s seem like the superior option, FSA’s work just as well for many people. The account that is best for you depends on your personal situation.
If you have questions regarding which account is right for you, a financial professional at Archstone Financial can work with you to establish the most appropriate savings vehicles to provide you with financial security for both your health and wealth.
Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC).
Archstone Financial is not a subsidiary of nor controlled by Voya Financial Advisors.