Both HSAs and FSAs allow employees with health insurance to set aside money
for health care costs referred to as “qualified
expenses,” including deductibles, copayments
and coinsurance, and monthly prescription
costs. Sometimes employers will also contribute funds to these accounts. In
most cases, you receive a debit card for your account and can use it to pay for
qualifying expenses throughout the year. Both types of accounts have tax
benefits, too, although those benefits aren’t the same.
In general, electing to sign up for an HSA or FSA is smart. Knowing which one
to select and how to get the most out of it will take some education.
Are you eligible for an HSA?
Health
savings accounts are not available to everyone. This is the first key
difference, and if you aren’t eligible for an HSA, it makes your decision much
easier. Only people who have high
deductible health plans, or HDHPs, can select an HSA.
For 2015, an HDHP is defined as health insurance with a deductible of $1,300
or more for an individual or $2,600 or more for a family. To qualify for an HSA,
this HDHP must be your only health insurance plan, you must not be eligible for
Medicare and you cannot be claimed as a dependent on someone else’s tax
return.
Important differences between FSAs and HSAs
As you can see in
the following table, there are several additional differences between these
accounts. Things like your flexibility in contributing, the ability to keep your
unused balance and additional tax benefits make HSAs the wisest choice if you
have the option. Still, either account stands to save you money and make
budgeting for medical costs easier.
|
Health savings account (HSA) |
Flexible spending account (FSA) |
| Eligibility requirements |
|
- No eligibility requirements
|
| Contribution limit |
|
- 2015 contributions capped at $2,550
|
| Changing contribution amounts |
- You can change how much you contribute to the account at any point
during the year.
|
- Contribution amounts can be adjusted only at open enrollment or with
a change in employment or family status.
|
| Rollover |
- Unused balances roll over into the next year.
|
- With a few exceptions, FSAs are “use
it or lose it,” and you forfeit any unused balance.
|
| Connection to employer |
- Your HSA can follow you as you change employment.
|
- In most cases, you’ll lose your FSA with a job change. One
exception: if you’re eligible for FSA continuation through
COBRA.
|
| Effect on taxes |
- Contributions are tax-deductible, but can also be taken out of your
pay pretax. Growth and distributions are tax-free.
|
- Contributions are pretax, and distributions are untaxed.
|
You cannot choose both, unless …
If you qualify for an HSA, you
cannot elect to set up both an HSA and an FSA, unless the FSA is a “limited
purpose” FSA. Your HR representative will be able to tell you if this is the
case at your new job.
A limited purpose FSA works like a regular FSA but can be used only for vision care and dental expenses. If you expect to have high medical costs throughout the year, or want to maximize contributions to your HSA while minimizing your withdrawals, using a limited purpose FSA for expected vision and dental expenses could be a smart choice.
Which should you choose?
Both accounts have benefits that can make managing your out-of-pocket medical expenses easier throughout the year. But you should opt for an HSA if you qualify, if for no other reason than the limits are higher and you can carry over your contributions from year to year. If you don’t qualify, sign up for the FSA.
A good rule of thumb as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs, anticipated doctor’s visits and any planned treatments or surgeries. Also, don’t be afraid to ask your HR representative as you come across questions; you can’t be expected to know all of the ins and outs of your new benefits.