FSA or HSA: Which One is Right for You?

Tuesday March 28th, 2017

FSA-HSAUnderstanding your options for covering out-of-pocket medical and healthcare costs is important so that you can save as much money as possible. But it can sometimes be hard to keep track of all the options available, as there are many accounts available.

The most popular options in medical accounts are Health Savings Accounts (HSA) and Flexible Savings Accounts (FSA), which are both tax-favored accounts. You’ve probably heard both terms tossed around by your employer or your insurance company. While they do share a few similarities, it’s more important to learn about their differences in order to make the best choice for you.

What is a Health Savings Account?

A health savings account is intended to supplement the medical expense needs of people who pay a large portion of their healthcare costs and have high-deductible insurance plans. You cannot be taxed on  your HSA contributions, as long as you use the funds to cover medical expenses for you or a family member. HSAs are offered by employers as a fringe benefit, and some employers will match an employees contribution up to a certain amount. The benefit of an HSA is that you can enroll in one even if your employer doesn’t offer it as long as you have an eligible high-deductible insurance plan.

HSAs have larger contribution limits than FSAs, allowing you to contribute up to $3,350 for individuals and $6,750 for families, with an additional $1,000 added to each limit for those over age 55.

The money you save in an HSA account carries over to the next year and is not forfeited if you don’t use it by the end of the year. You can even use your HSA as an investment opportunity with some financial institutions. Because of that, many people take advantage of this and use their health savings accounts almost like retirement savings accounts.

What is a Flexible Savings Account?

FSAs are also fringe benefits offered by employers to help employees offset the costs of out-of-pocket medical and dependent care expenses. But you can only enroll in an FSA if it is offered as a benefit by your employer. It is also exempt from income tax and payroll tax, which could save additional funds.

While some FSA plans have changed to allow you to carry over at least a portion of savings from one year to the next, some still do not allow rollover. In that case, the money you’ve saved in your FSA would be forfeited at the end of the year if not used for any qualifying expenses. Because of this, it’s very important to read all the terms of your FSA before you set up the account.

Another major difference is that FSAs do not allow for investing the money yourself. Money in your FSA is directly withdrawn from your paycheck and remains with your employer until you need it. The FSA contribution limit is capped at $2,600 for all participants.

In addition to the tax savings you receive from enrolling in either the FSA or HSA, you’ll have peace of mind in knowing that you have money set aside for any medical expenses.