What’s the Difference Between HSA and FSA Accounts – Can I Have Both?
In 2019, American families spent as much as $7,000 on out-of-pocket medical costs. U.S. healthcare costs are expected to continue growing annually, leaving many families wondering how their budgets can absorb additional medical expenses (even with employer-based insurance policies).
Both a Health Savings Account (HSA) and a Flexible Spending Account (FSA) can help you and your family save on planned and unexpected medical costs throughout the year.
But what’s the difference between HSA and FSA accounts? We break down the details below.
What Are HSAs and FSAs?
Both types of accounts enable health insurance policy owners to set aside money for qualified medical expenses. These may include copayments, coinsurance, medical supplies, and deductibles. But there are some important differences between HSAs and FSAs to understand.
HSAs are only available to those with a qualified high-deductible health plans. The minimum deductible amount to qualify is annually determined by the government, along with the maximum amount of funds that can be contributed to the account. For current numbers, click here.
FSAs can only be opened as part of an employer benefits plan. You get to decide how much money to contribute from each paycheck but must use the funds by the end of the calendar year. Some employers have a rollover option but the IRS limits the amount each year. Additionally, rules may be revised considering COVID-19. Visit the IRS’ website for the most current details.
What’s the Difference Between HSA and FSA Accounts?
The main difference between the two types of accounts is who can open them. HSAs are only available to those with qualified high-deductible health plans, including independent policies, while FSAs can only be opened through an employer healthcare plan. However, there are some other important differences to keep in mind.
Employment
An HSA can follow you if you change jobs. If you lose your job and are temporarily unemployed, you can still contribute to an existing HSA that is paired with a HDHP qualified plan. With an FSA, you’ll more than likely lose it should you change or lose jobs, unless you qualify for continuation through COBRA.
Tax benefits
Both types of plans offer substantial tax benefits. HSA contributions can be deducted pre-tax or they can be deposited with post-tax dollars and claimed on your annual tax return. Contributions to an FSA are taken out pre-tax. Distributions for both FSA and HSA are tax-free for qualified expenses.
Contribution adjustments
You can change your contribution amount to an HSA at any time throughout the year. With an FSA, contribution amounts can only be adjusted during an open enrollment window, a change in family status, or a switch in employment.
Can I Have Both Types of Accounts?
In most cases, no. If you qualify for both, the only way you can have more than one type is by having an HSA and a “limited purpose” FSA.
A “limited purpose” FSA has, as the name suggests, limitations. This type of account can only be used for dental and vision expenses. If you believe your family’s medical expenses warrant having two accounts, it’s in your interest to speak to your employer to see if this is an option.
HSA or FSA – Which Is Right for Me?
At the end of the day, there’s no one-size-fits-all answer to which type of account is a better fit for you and your family. Most families can benefit from both types of accounts, which can make it difficult to choose if you qualify for both.
Generally speaking, if you’re healthy overall with few prescriptions or medical conditions, an HSA can help you manage your health care expenses without having to pay high monthly premiums.
The main concern with this route is that should you unexpectedly incur high medical costs, your high deductible health plan can leave you paying a significant amount out of pocket.
If your employer offers an FSA and you have a good guestimate on your family’s typical out-of-pocket medical expenses for the year, you can enjoy significant tax benefits while enjoying the peace of mind that comes with having less unpaid medical bills. Just keep in mind that any funds you don’t use can’t be recouped (consider our top suggestions for utilizing leftover FSA funds).
What’s the difference between HSA and FSA accounts? For some, not that much. But for others, one type of account can save them significantly more than the other. Speaking with your HR department can help you learn more about what your employer offers and which route is best for you.