HSA vs. FSA: Comparing Strategies

What is the difference between a Health Savings Account and a Flexible Spending Account?

A health savings account (HSA) and a flexible spending account (FSA) are both great savings vehicles to make your dollars stretch further for healthcare costs. With either option, your employer can contribute pretax dollars into your account, and you can use these tax-free funds to cover your qualified health-related expenses, including prescription, vision and dental costs.

If you are eligible for both, you should consider the differences between an FSA and an HSA to decide which account may be the right choice for you.

What Is an HSA?

A health savings account (HSA) can be used to save for health-related expenses. When used in combination with a high-deductible health plan (HDHP), you can dramatically lower your monthly premium for your health insurance. A health plan with a higher deductible also means a lower premium and potential savings. For employers, healthcare and salaries are some of the largest expenses, so many are drawn to HSAs for the savings.

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How an HSA Works

Generally, you must have an HDHP to qualify for an HSA. With your HSA, you can cover the smaller qualified health expenses like antibiotics, and your insurance plan will cover the larger expenses after your deductible. With this strategy, you are insured against medical emergencies that are less likely to occur, and you're paying out-of-pocket for the more affordable, minor health issues.

When You Might Want to Have an HSA

There are some circumstances in which you may want to have an HSA, such as the following:

• You unexpectedly get sick: If you have been contributing to your HSA, you'll have savings you can use to cover your medical costs if you do get sick.
• You rarely get sick: If you rarely go to the doctor and are in overall good health, you can put your monthly premium savings and your employer's contribution into your HSA each year. After a few years of saving, you may have a large, tax-free nest egg you can use for healthcare expenses that come up.

In these cases, an HSA may make financial sense for you. If you have a chronic health condition, on the other hand, you may be better off choosing a traditional health plan.

Pros and Cons of an HSA

When employers offer employees an HSA, everyone can save money. Along with reduced premiums, your employer may even contribute to your HSA. If you're thinking about enrolling in an HDHP and HSA, consider the pros and cons to help you make your decision.

Advantages of an HSA include:

• HSA funds remain yours: With an HSA, the money remains yours, even if you switch employers, and you can use the funds at any time. You can use your savings when you're older or retired if you're in great health right now. Your funds also roll over every year, letting you save what you don't spend.
• HSAs are more affordable: HSAs are usually more affordable than traditional plans. You'll save on your premium, and you may save more with an employer contribution. For many, the savings that occur after switching from a traditional health maintenance organization (HMO) or preferred provider organization (PPO) plan to an HSA and HDHP are significant. If medical costs do come up, you can cover them with tax-free dollars from your HSA.
• HSAs are tax-free: The money you contribute to your HSA is tax-free, the money you withdraw is tax-free and any interest your funds earn is also tax-free. This could mean your savings are even greater.

Of course, there are also some things to consider if choosing an HSA and an HDHP combination. Potential disadvantages of an HSA include:

• HSAs are riskier: HSAs tend to be riskier than a traditional plan. Many employees are concerned about switching to an HSA because of the higher deductible associated with an HDHP. If you haven't been able to build up a nest egg in your HSA yet, you could spend more money out of pocket to cover your medical costs if you do get sick.
• Taxes are applied to non-medical expenses: If you withdraw funds from your HSA for a non-qualifying expense, you will need to pay taxes.
• HSAs can discourage medical treatment: If you get too wrapped up in saving and don't want to touch the nest egg in your HSA, you may delay or avoid seeking medical treatment, even when you need it. If you do choose an HSA, make sure you prioritize your health over your HSA savings.

For many, an HSA is a great savings vehicle for health-related expenses. If you're not sure whether an HSA is right for you, another option is an FSA.

What Is an FSA?

A flexible spending account, or FSA, provides the ability to save pretax money and use it on qualified healthcare expenses. Employers can offer an FSA as part of their benefits package, and this account can be used in combination with any health insurance plan.

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How an FSA Works

Employers can offer FSA options, which function like a personal savings account. With an FSA, you can use your funds to cover the healthcare expenses you pay for out of pocket. A limited-purpose FSA, for example, allows you to spend your funds primarily on vision and dental expenses, but you may be able to pair it with an HSA when you have an HDHP. You can't combine a healthcare FSA with an HSA.

Another FSA option is a dependent-care FSA. This option covers care costs for dependent adults or childcare costs for young children, including:

• Daycare
• Afterschool care
• Preschool
• Babysitting
• Summer day camp

You can choose to combine a dependent-care FSA with a healthcare FSA or an HSA. If you opt for a lower-deductible health plan, you can choose to enroll in a flexible spending account to minimize your spending on health-related costs.

When You Might Choose an FSA

There are a few situations in which you may choose an FSA, but your employer must provide the program. If you're a working parent, you may want to open an FSA to cover your family's medical costs, especially if you, your spouse or your kids are regularly getting sick or making visits to the doctor. Due to your frequent doctor visits, it may be better for you to choose a low-deductible plan, and you can use the FSA to cover your out-of-pocket costs.

You may also want to choose an FSA if you are single and don't have many healthcare expenses, but you do have prescription glasses. If you choose a high-deductible plan, you may want to open a limited-purpose FSA as well, so you can use these funds to cover your dental and vision expenses.

Pros and Cons of an FSA

If you're considering enrolling in an FSA, you may want to consider the pros and cons of this account to help you make your decision.

Advantages of an FSA include:

• FSAs help you lower taxable income: Since you are contributing your pretax dollars to your FSA, you can lower your taxable income. Similarly, FSAs can also decrease an employer's tax liability with additional tax savings.
• FSAs can be used with low-deductible plans: If you have a health insurance plan with a low deductible, you may still be eligible for an FSA.
• FSAs can be used to cover childcare expenses: One of the unique benefits of an FSA is that you can use the funds to cover your childcare expenses with the dependent-care option.

Possible disadvantages you may encounter with an FSA include:

• FSAs come with some restrictions: At the start of your plan's year, you need to determine how much you will contribute, and you can't invest this money. Similar to an HSA, you can only use your funds for qualifying medical expenses.
• FSA funds may be forfeited if unused: If you don't spend your savings by the end of the year, you may forfeit your funds. Only up to $550 can roll over into the next year.
• FSAs are owned by employers: Since employers own FSAs, you may also lose your money if you switch employers.

Differences and Similarities Between an HSA and FSA

These healthcare saving accounts work similarly. You and your employer may be able to contribute to your account. You determine how much you want to contribute, and your employer withholds the funds from your gross wages every pay period. Eligible expenses are the same for both plans, including qualifying prescriptions, deductibles, copays and certain medical equipment.

The Difference Between an FSA and an HSA

There are a few ways in which FSAs and HSAs differ.

• Who can open an account: Whether you are FSA or HSA eligible depends on your health insurance plan and whether you are an employee. While FSAs can only be used by employees, HSAs can be used by both employees and self-employed individuals. To get an HSA, you need to be enrolled in an HDHP, while you can still get an FSA with a low-deductible plan. For an HSA, you also cannot be enrolled in Medicare or be claimed as a dependent on someone else's tax return.
• Who owns the account: While employees own HSAs, employers own FSAs. This can affect whether you can keep your money if you switch employers.
• How much you can contribute: The amounts you can contribute differ between an FSA and an HSA. You can change your contribution amount for your HSA anytime during the year, whereas you select how much you want to contribute to your FSA during the open enrollment period or after a qualifying life event. For instance, you can change your FSA contribution amount if you have a family status change during the year, such as marriage or divorce.

Is an FSA the Same as an HSA for Tax Purposes?

In terms of taxes, FSAs and HSAs are similar. You'll contribute pretax money into these accounts, which can lower your tax liability. Since you can get an HSA whether you are employed or self-employed, the tax considerations can be a little different. With an employer-sponsored account, your contributions aren't subject to income or payroll taxes. If you are self-employed, your HSA contributions can be deducted on your federal tax return.

Is an HSA or an FSA Better?

Whether an HSA or an FSA is better depends on your specific health and financial circumstances. For many who meet the eligibility requirements for both, an HSA tends to be the better option, as you can contribute more each year and roll over any unused funds or take the account with you if you change employers. Keep in mind the advantages and disadvantages of both options to help you choose the best account for you. In some cases, you may not actually have to choose between the two.

Can You Have Both an HSA and an FSA?

You can have an HSA in addition to a dependent-care FSA and a limited-purpose FSA. This means you can use the type of FSA you have to cover dependent costs or dental and vision while also using your HSA. You cannot have a healthcare FSA in combination with an HSA.

How Much Should You Contribute to an HSA or FSA?

How much you should contribute to an HSA or FSA depends on both your unique circumstances and the contribution limits:

• HSA Contribution limits: For an HSA with a self-only HDHP, you can contribute as much as $3,650, while you can contribute as much as $7,300 if you have a family HDHP.
• FSA Contribution limits: For your FSA, your salary reduction contributions are limited to $2,750 annually.

Beyond your contribution limit, estimate your annual healthcare expenses to determine how much you should contribute to your account. Factor in your routine care, your known health conditions, your planned care and unexpected health costs.

Is Having an FSA or HSA Worth It?

To determine whether an HSA or FSA is worth it, you can first calculate your potential annual savings and compare that number to your deductible. To calculate your potential savings, add your premium savings and the employer contribution. When you do this, you'll determine your breakeven point so you can figure out how long you'll need to save without a major medical expense before your HSA or FSA saves you money.

Before you open an account, it can also be helpful to assess your current health and recent medical expenses. Review how much you spent on medical care in the past couple of years to determine whether an HSA or FSA makes financial sense for your situation. For many Americans, HSAs and FSAs are well worth the annual savings.

Contact The Difference Card

At The Difference Card, we have saved clients 18% on annual health insurance costs since 2001 with our one-of-a-kind solution. Our team of underwriters and in-house actuary develop The Difference Guarantee rates. If you're an employer, you can save on healthcare costs without losing health benefits by partnering with us. Many employers who work with us save an average of more than $2,000 per employee annually.

As a member, you can benefit through reduced healthcare costs and tax savings. Submitting a claim is faster, and we process most claims within just two business days. To learn more about cost-effective, custom health insurance benefits, contact us at The Difference Card to request a proposal.

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