Both HSA and FSA are accounts that allow individuals to save up and specifically cover out-of-pocket healthcare costs. These costs, also referred to as qualified medical costs, encompass fees related to coinsurances, copayments, and any deductibles that you would pay to your doctor.
When you enroll for one of these accounts, you will typically be provided a debit card that you can use to pay for the expenses. Both these accounts offer tax benefits; however, their range varies depending on the initial cost.
What Are HSAs?
HSA, an acronym to Health Savings Account, are unconventional saving accounts for people with high-deductible healthcare plans, also known as HDHP. Each year the government re-strategizes the minimum deductible rate for a plan to qualify as an HDHP.
If you’re planning to hire a private broker to open up your HSA account, the deduction for the year’s contribution can be made through your taxes. If your company is registering an HSA account on your behalf, then it’s more likely to be funded with the pretax from your paycheck.
You can even use your HSA funds as an investment; the balance amount can be grown tax-free; only if your custodian allows and you haven’t done much spending. Regrettably, your HDHP plan could be your only healthcare plan to become eligible for HSA. This means you can’t apply for Medicare or any other health plan. Moreover, you shouldn’t be dependent on someone else’s tax returns.
What Are FSAs?
Flexible Spending Accounts, FSAs are packaged benefits that only your employer can offer you. Unfortunately, you can’t get it on your own, although its use is similar to HSAs. But you can’t use the account for investment as you end up losing the unspent amount at the end of the year unless your employer has opted for the “rollover.” Even then, you can roll only $500 in the next year’s plan.
Typically, the FSAs are pre-funded, meaning you can spend the amount at the beginning of the year. Deductions will be made from your monthly paycheck; however, if you leave your company in the middle of the year, then you have to pay back the spent funds.
Key Differences Between an HSA and FSA
|
Factors |
HSA |
FSA |
|
Eligibility |
Must have HDHP |
Only employers can buy for their workers |
|
Contribution Limit |
Higher contribution with the option to double it for families |
Lower contribution limit |
|
Rollover Option |
The unused amount rolls over to the next year |
Forfeits the remaining amount unless the employer caps it at $500 |
|
Tax Benefits |
Contributions are tax-deductibles while growth and distribution are tax-free |
Contributions are pre-tax while distribution is tax-free |
Which One is Best for Me?
You can’t have an HSA and FSA together unless your FSA is for a limited purpose, which means you can use it only for vision and dental care. However, both offer financial benefits to cover the out-of-pocket cost of medical bills.
The rule of thumb is: healthy, young adults should opt for an HSA as they require fewer visits to the doctor and prescription drugs. Although HDHP is the cheapest healthcare plans, their out of pocket cost is also quite high and may charge as much as $16,000 per year for a family.
Final Remarks
Those with high medical bills need to pay significant amounts even after making regular contributions to the HSA plan. On the other hand, FSA is less flexible but allows you to save money to cover your qualified medical expenses.