HSA vs. FSA Accounts: What Are The Differences?
Americans may face surprise medical bills that insurance won’t cover, leading them to have to find other methods to pay for these expenses. Opting for a health savings account (HSA) or a flexible spending account (FSA) can help offset the financial burden of unanticipated medical expenses that insurance won’t cover. However, there are significant differences in how these two accounts work and in contributions limits, so it’s essential to choose the one that works best for your financial situation.
What are HSA and FSA accounts?
An HSA is a savings account that people with high deductible health plans (HDHP) can use to save for medical expenses. However, to open an account, individuals need to meet specific criteria – they must be covered under a qualified HDHP, not a non-qualified health plan, not have Medicare coverage, and cannot be claimed as a dependent on another individual’s tax return. With an HSA, you can invest the money, enabling you to build wealth for future expenses.
On the other hand, an FSA is similar to an HSA in that it allows individuals to save for medical expenses. One difference is that individuals do not need an HDHP to qualify for an FSA. The employer only has to offer FSA enrollment for eligibility. Another major difference is that each account has different contribution limits. The new HSA contribution limits for 2024 are $4,150 for single individuals (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023). The FSA contribution limit for 2023 is lower at $3,050 per account, irrespective of individual or family coverage.
What’s a high deductible health plan (HDHP)?
A HDHP is a health insurance plan that has a high minimum amount that must be paid before insurance coverage kicks in and covers the remaining cost of medical expenses. To be considered a HDHP, the plan must have a minimum deductible of $1,500 for self-only coverage and a minimum deductible of $3,000 for family coverage, according to 2023 guidelines.
How do HSA and FSA accounts work?
An HSA has three distinct tax advantages – it lets you make pre-tax contributions, grow your funds tax-free, and withdraw your funds tax-free for qualifying medical expenses. However, if you don’t use the money for medical expenses, you can wait until age 65 to withdraw your funds and avoid incurring penalty fees for non-medical reasons. In contrast, an FSA allows pre-tax contributions but does not allow investing. However, the money is “use it or lose it,” and you typically cannot roll over funds to the next year.
Should you choose an HSA or FSA?
It’s worth noting that you cannot contribute to both an HSA and FSA at the same time. An HSA is most advantageous when individuals do not require frequent out-of-pocket medical expenses. This gives money time to grow, so if people get hit with a large medical expense in the future, they should have a higher balance to cover the bill. An FSA could make more sense for individuals with more regular medical expenses throughout the year since the money is “use it or lose it.”
What are some alternatives?
If individuals do not meet the criteria for either an HSA or FSA or neither account makes sense for them, there are still some other smart ways to save for healthcare-related costs. For example, individuals could open a Roth IRA account with a reputable brokerage and make contributions to that or opt for a high-yield savings account to stash away money meant for out-of-pocket medical expenses.
Ultimately, carefully considering financial needs and seeking expert advice help individuals make the right choice in opting for an HSA or FSA account.
FAQs
1. Can I have both an HSA and FSA at the same time?
No, you cannot contribute to both an HSA and FSA account at the same time.
2. What are the contribution limits for HSA and FSA accounts?
The new HSA contribution limits for 2024 are $4,150 for single individuals and $8,300 for family coverage. The FSA contribution limit for 2023 is $3,050 per account, irrespective of individual or family coverage.
3. What’s a high deductible health plan (HDHP)?
A health insurance plan that has a high minimum amount that must be paid before coverage kicks in and covers the remaining cost of medical expenses.
4. What are some alternatives to HSA and FSA accounts?
Alternatives to HSA and FSA accounts include opening a Roth IRA account with a reputable brokerage or opting for a high-yield savings account.
What distinguishes HSA and FSA accounts?
If you’ve ever faced a medical expense that your insurance doesn’t cover, you know how financially burdensome it can be. However, a health savings account (HSA) or a flexible spending account (FSA) can help alleviate some of the financial stress. While both types of accounts are designed for medical expenses that insurance doesn’t cover, there are some differences to consider before choosing one.
CNBC Select breaks down the key features of both accounts for consumers to weigh up before making a decision. An HSA is designed to help consumers with high-deductible health plans (HDHP) to save for medical expenses by making pre-tax contributions that grow tax-free. Notably, funds in HSA accounts can even be invested, making it easy to save for medical expenses and build wealth for the future. HSA accounts roll over every year, even if you haven’t used any of the funds.
An FSA is similar to an HSA but has some notable differences. Unlike an HSA, you do not need to have a high deductible health plan to qualify for an FSA: your employer only needs to offer FSA enrollment. Additionally, contributions to an FSA are pre-tax but cannot be invested. FSAs are “use it or lose it,” with any funds unused by the end of the year typically forfeited. However, some employers may allow a small portion of funds to roll over or provide a grace period for employees to use them up before they expire.
When choosing between HSA and FSA accounts, individuals need to consider their medical needs and expenses. If medical expenses are infrequent, an HSA may be the better choice since the funds are unlikely to get used up quickly. Those with more regular medical expenses, on the other hand, may find an FSA more suitable, given the “use it or lose it” policy as funds are more likely to be used up over the year. It is worth noting that individuals cannot contribute to both types of accounts in the same year.
Before establishing an HSA or FSA account, consumers should ensure they have an emergency fund in place to cover unexpected expenses. Additionally, if retirement savings are a priority, individuals are urged to contribute first to employer-sponsored 401(k) accounts and Roth IRAs, which are designed for retirement funding and have higher contribution limits than HSAs and FSAs.
For those who don’t qualify for HSA or FSA accounts or who don’t find either account suitable, there are still options for saving for healthcare-related expenses. For example, a high-yield savings account can be used to save money specifically for medical expenses, with the added benefit of not being tied to an employer and not having any “use it or lose it” policy. Additionally, those interested in using an HSA for retirement purposes may choose to open a Roth IRA. Reputable brokerage firms like Betterment may be helpful.