When researching the best healthcare plan for you, thoroughly exploring your options is vital. Throughout your search, you may come across HSAs and FSAs. For more information on what they are, their pros and cons and the key differences between the two, check out the information below.
What is an HSA?
A Health Savings Account (HSA) is a type of personal savings account that allows users to save pre-taxed money to pay for medical expenses that qualify in their plan.
Users save money in their plan by making periodic contributions; however, only people with a High Deductible Health Plan (HDHP) are allowed to contribute to an HSA. An HDHP covers only preventative services before the deductible.
There are generally no time constraints when users can utilize HSA funds from their accounts to pay for healthcare expenses.
Related: How to Protect Your Money from Getting Eaten by Health-Care Costs
Ordinary expenses people typically pay with their HSA savings include:
- Insurance deductibles
- Insurance copays
Ordinaryqualified medical expenses generally include:
- Ambulance transport
- Doctor visits
- Acupuncture or chiropractor
- Hearing aids
- Therapy and other psychiatric care
- Some long-term care services
Again, to hold an HSA, you must have a High Deductible Health Plan. In 2022, the minimum deductible for family coverage was $2,800 and $1,400 for an individual. Concerning that, the maximum contribution for an HSA was $7,300 for a family and $3,650 for an individual.
In 2023, the contribution maximum has risen to $7,750 for a family and $3,850 for an individual.
The good news is that the contribution amount from one year carries over to the next, though some options may have a limit to the max amount that’s allowed to roll over.
Related: 7 Key Benefits to a Health Savings Account
What are the pros and cons of an HSA?
If you’re interested in adopting an HSA plan, make sure you understand the benefits and risks of the plan.
Pros of a Health Savings Account
- No federal income tax: Boththe money you contribute to an HSA account, the interest accrued and withdrawals are exempt from federal income tax, as noted by the IRS.
- The money is yours: The funds do not expire; they are yours even if your job changes, and it rolls over every year.
- The money is investible: Because it is a savings account, you can invest your HSA money to grow over the years and save for future healthcare costs that are especially useful in retirement.
- Open to spouse and dependents: Because the money is yours, sometimes you can pay for your spouse’s or dependents’ eligible medical costs, even if your HDHP does not cover them.
- No minimum deposit: Generally, you do not need a down payment to open an HSA.
Related: How to Use a Health Savings Account (HSA) to Build Wealth
Cons of a Health Savings Account
- Tax drawbacks: One big stipulation to HSAs is that the money you withdraw from the account for nonmedical expenses before age 65 is subject to taxable income. In addition, you must stop contributing to your HSA at least six months before applying for Social Security benefits, or you may be subject to tax penalties.
- Eligibility: If you are a dependent on a tax return, you cannot open an HSA.
- Selective:HSAdebit cards are only accepted in some places, which can be limiting. Make sure you know where you can use your HSAdebit card, so you are not hit with out-of-pocket expenses. (This said, many options now offer a Mastercard or Visa logo so the card can be processed as credit, which is much more widely accepted).
- Earnings and investment limits: Because HSA interest rates are low, they still accrue money but not much. Also, contributions are no longer allowed once a plan holder reaches 65.
What is an FSA?
A Flexible Spending Account (FSA), also referred to as a Flexible Spending Arrangement, is an arrangement through a person’s employer that allows them to use tax-free money to pay for out-of-pocket expenses.
Standard qualified medical costs generally include:
- Insurance copays
- Insurance deductibles
- Medical devices
With an FSA, the employer sets a contribution limit of up to $3,050. At the end of the year, if the employee has not used up the FSA funds, they may be granted two and a half more months to use up that money, or they can choose to roll over up to $610 for next year’s plan.
Related: 3 Simple Ways to Achieve Personal and Financial Confidence
What are the pros and cons of an FSA?
If you’re interested in adopting a limited-purpose FSA plan, make sure you understand the benefits and risks of this type of account.
Pros of an FSA
- Tax-free:FSA contributions are not taxed, nor is money deducted from your paycheck. Tax savings can be one of the most attractive aspects of FSA plans.
- Balance freedom: Even if your FSA balance does not cover the medical expense you need, you can pay for that expense and obtain reimbursement. Remember that you must contribute the expenses to your account by the end of the year.
- Employer contribution match: It is possible your employer offersFSA contribution matching. However, the total combined contributions between you and your employer cannot exceed $3,050.
Cons of an FSA
- No rollover: In FSAs, if you don’t use it, you lose it. Some FSAs might have grace periods; however, unused funds in your account won’t roll over to the next year.
- No interest: You cannot invest funds or accrue interest with an FSA.
- The money isn’t yours: If you were to leave the employer that sponsors your FSA, you do not get to bring that money.
Key differences between an HSA and FSA
One of the most helpful ways to decide between an HSA and an FSA is by looking at some key attributes side-by-side. See below the key differences between a Health Savings Account and a Flexible Spending Account.
- HSA: To be HSA-eligible, you must have a High Deductible Health Plan.
- FSA: To open a healthcare FSA, your employer must offer the option to you.
- HSA: In 2022, the minimum deductible for family coverage was $2,800 and $1,400 for an individual. The maximum HSA contribution limit was $7,300 for a family and $3,650 for an individual. In 2023, the contribution maximum has risen to $7,750 for a family and $3,850 for an individual.
- FSA: With an FSA, the employer sets a contribution limit of up to $3,050. An employer can contribute to the health insurance plan, but the total contributions cannot exceed the overall limit.
- HSA: Employees can add and change HSA contributions throughout the plan year.
- FSA: Once a contribution is set, it cannot be changed throughout the year unless there is a “qualifying event.”
Owner of account
- HSA: The account is wholly owned by the individual.
- FSA: The account is owned and supplied by the employer.
Contributions of employer
- HSA: An employer may contribute to the plan in addition to the individual. However, the contribution maximum cannot exceed $3,850 for an individual and $7,750 for a family.
- FSA: Employers can contribute to the plan, but their contributions may not exceed $500. After $500, employers are only allowed to match dollar-for-dollar employee contributions.
- HSA: Contributions can be distributed from your pre-taxed salary, or they can be tax deductible.
- FSA: Because contributions are pre-tax, they are considered salary deferrals.
Related: 75 Items You May Be Able to Deduct from Your Taxes
- HSA: This account does accrue interest.
- FSA: This account does not accrue interest.
Related: Where Are Interest Rates Going This Year? A Lot Higher
- HSA: Balances that are unused carry over to the next year.
- FSA: You must use the contributions in your account, or they will be lost the following year. The only exception is if an employer allows rollover, for which the time is capped at two and a half months, and the rollover amount is capped at $610.
Related: Think You Need to Roll Over Your 401(k) After You Leave Your Job? 6 Reasons You Might Not Want to, Explained
- HSA: The employee owns the account, which means their money follows them from one job to the next.
- FSA: Because the employer owns the account, the employee forfeits the account should they change companies. The only exception comes with a COBRA continuation election of health insurance coverage within 60 days of a job change.
HSA vs. FSA: Which is right for you?
As you continue your health insurance research, remember the pros, cons and key differences between HSAs and FSAs. Choosing the right healthcare plan is a personal decision you should make for yourself and your family.
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