Even if you have good health insurance, there are bound to be expenses you have to pay. This can include things like the deductible, prescriptions and medical supplies that aren’t covered, and a co-pay. Luckily, there are accounts that let you pay these expenses tax-free – a health savings account (HSA) and a flexible spending account (FSA). Let’s compare HSA vs FSA to see which suits you better.
What is an HSA?
An HSA is a tax-free savings account specifically for health-related purchases. The money deposited into your account is deducted from your gross wages before taxes are computed. This lowers the amount of tax you have to pay. Your employer may also contribute to the account on your behalf.
An HSA account is owned by you and only you can make purchases. However, the money in an HSA may only be used for healthcare expenses that are not covered by your health insurance policy.
A true HSA can only be opened if you have a high deductible health plan (HDHP). This type of health plan has specific requirements set by the federal government. The HSA is set up to help offset some of your out-of-pocket health-related expenses.
Benefits of an HSA
One of the main benefits of having an HSA is that the money deposited into the account is tax-free. This offsets some of your out-of-pocket expenses, which is nice when you have an HDHP.
However, you need to keep in mind, there are annual limits for HSA contributions and the money in the account can only be used on hSA-eligible health-related expenses.
Another huge difference between an HSA and an FSA, and a major benefit of an HSA, is that the funds in your HSA account roll over annually. With an FSA, you lose any funds you don’t use by the deadline.
Contributing to an HSA
Once you have an HSA, take the paperwork to your employer to have money deposited into the account. You can contribute up to $3,650 per year if you are single and up to $7,300 a year for a family.
You decide how much you want to come from each paycheck. If you need to change the amount you contribute, you need to notify your employer.
HSA-eligible expenses include, but are not limited to:
- Deductibles for your insurance policy
- Dental services (although cosmetic dentistry may not be included)
- Eye doctor appointments and any prescription eyewear to correct your vision
- Medical equipment such as crutches, CPAP machines, or ostomy bags
- Over-the-counter medicine
- Feminine hygiene products
- Prescription medications not covered by your insurance or prescription co-pays
If you have an out-of-pocket expense that has anything to do with your health, check the terms of your HSA to see if it is covered.
What is an FSA?
An FSA is a savings account you contribute to from your pre-tax income. The account is held by your employer, so if you change jobs you lose any funds in the account.
The main difference between FSA vs HSA accounts is that an FSA is owned by your employer and the funds don’t roll over each year, while you own an HSA and the funds do roll over annually.
Benefits of an FSA
With an FSA, you can only contribute up to $2, 750 annually to the for healthcare, but you can also contribute $5,000 per year for dependent care. Dependant care contributions aren’t allowed with an HSA. You can use these funds to pay for daycare or adult care costs.
Contributing to an FSA
You must choose how much you want to contribute to an FSA each payday on or before the first paycheck of the year. Once this amount is set, it’s automatically deducted from your pre-tax wages. Your employer may also make contributions on your behalf.
FSA vs HSA-eligible expenses are pretty much the same as normal healthcare costs. The dependent care portion of your FSA can be used for:
- Daycare programs
- Summer camp programs
- Housekeeping expenses related to dependent care
- Adult daycare
- Adult care programs
You may ask your employee for a list of eligible expenses for both the healthcare portion and the dependent care portion.
HSA vs FSA Comparison
When doing an HSA vs FSA comparison it is best to just note the differences between the two. These differences include:
- An HSA is owned by you, and you may keep the account if you leave your employer. An FSA is owned by your employer. You forfeit any funds in it if you change jobs
- Funds in an HSA roll over annually. With an FSA, you lose any funds not used for the year.
- An FSA has two portions, one for healthcare expenses and the other for dependent care expenses. An HSA does not pay for dependent care expenses.
- An HSA requires you have an HDHP. An FSA doesn’t.
- Annual contribution limits are higher for HSAs than they are for FSAs.
Can you have an HSA and an FSA?
Yes, it is possible to have both an FSA and an HSA as long as your health insurance is an HDHP. Your employer will hold the FSA and you will hold the HSA.
Is an HSA or an FSA the better option for you?
If you do not have to pay any dependent care, an HSA is usually the best option. However, you have to have an HDHP to have one. If you don’t, an FSA is your only option.
HSA vs FSA FAQs
Is it better to have an HSA or an FSA?
You must decide how much money you spend on healthcare and dependent care each year. Then, you can choose whether an FSA or HSA is better for you. Keep in mind that an FSA is not truly yours and you will forfeit the money if you change jobs or do not use it all each year. Also, if you don’t have an HDHP, you don’t qualify for an HSA.
Why would you choose an FSA over an HSA?
You can only have an HSA if you have an HDHP. If you don’t, you have to choose an FSA. You might also choose an FSA over an HSA if you pay for dependent care.
Is HSA always the best option?
No. HSAs aren’t the right choice for everyone. In fact, they aren’t even available to everyone. You need to make financial decisions based on your and your family’s needs.
Is an FSA worth it for a healthy person?
With an FSA you may choose to have funds deposited for dependent care, health care, or both. If you are healthy, you may want to consider only utilizing the dependent care portion of the account.
Is HSA worth it for a healthy person?
An HSA can be very beneficial for a healthy person. Since the funds in the account roll over and accumulate from year to year – and earn interest – you might appreciate having a decent savings available if your health needs increase later in life.
HSA vs FSA: Which Is Right For You?
Even when you have a good healthcare insurance plan there will be out-of-pocket expenses. Both an HSA and an FSA can be used to pay them and are funded with pre-tax wages. But the first step is getting the right health insurance. Get health insurance quotes now to choose the best plan for you. Then, determine if you qualify for an HSA or an FSA.