HSA or FSA: What are they and what makes the most sense?

There are various healthcare savings options that are currently available, but two of the main options are the Health Savings Account (HSA) and Flexible Spending Account (FSA). We’ll outline the two plans below and hopefully will shed some light on what can be a confusing topic.

Health Savings Account

These accounts have been in existence since 2003 and have become more popular due to the increased costs of health insurance plans.  The idea behind an HSA is for individuals and families to offset future co-pays and out-of-pocket costs by setting money aside in this account.  The funds that are put into this account can carry over from year to year if healthcare costs aren’t incurred, and are taken out tax-free when healthcare costs are incurred.  They must be paired with high-deductible healthcare plans (plans with deductibles of at least $1,350 for individuals and $2,700 for families, but most HSA eligible plans have deductibles that are much higher than this).  The maximum HSA contribution for 2018 is $3,450 for individuals and $6,900 for families.  Those over age 55 can contribute an additional $1,000 each year as well.  

HSA Pros

  • Above-the-line tax deduction of the annual contribution amount
  • Contributions can be invested in mutual funds, stocks, ETFs depending on the custodian that is chosen
  • Contributions can grow tax-deferred and be taken out tax-free for healthcare expenses at any time as long as healthcare charges are documented
  • Employers can make contributions to the accounts for individuals and families
  • Healthy individuals/families can often use these to stockpile funds in preparation for future healthcare expenses
  • Contributions can be used to pay for qualified healthcare costs in retirement and continue the tax-free status

HSA Cons

  • Contributions taken out for non-healthcare costs will be taxed at ordinary income rates along with a 20% penalty
  • Healthcare plan must be an HSA qualified plan to be eligible
  • The ownership of healthcare costs is primarily shifted to the insured and individuals/families must be ready to fund the plans accordingly
  • Healthcare costs can exceed plan contributions and the individual/families will be on the hook for the excess costs

Flexible Spending Account

These accounts have been in existence since the 1970s, but have evolved over the years into different variations.  These plans must be offered through an employer benefits package and fall under the cafeteria plan umbrella.  Employees can contribute funds on a before-tax basis for healthcare costs.  There are general medical, limited medical, and dependent care FSA accounts.  Each of these has a different funding purpose, but can be included in an employer’s benefits package.  Individuals can contribute up to $2,650/year to the plan and employers have the ability to contribute to the plan on their behalf as well.  There has been a use-it or lose-it stigma associated with FSA accounts in the past and changes have been made to allow up to $500 to be rolled over to the next calendar year or an extension until March 15 to use the funds from the previous calendar year.  

FSA Pros

  • Individuals can defer funds for healthcare expenses on a pre-tax basis through their employer
  • Employer can contribute to the FSA accounts on behalf of the employee
  • Employer can avoid the payroll tax on employee contributions that would normally be paid
  • Employees can withdraw funds on day one for medical expenses before any contributions have been made

FSA Cons

  • Little to none of the contribution amounts can be rolled over from year to year
  • There is no portability available since it’s an employer offered benefit
  • Contribution limit is less than the HSA account
  • Employees can only contribute to an FSA if the employer offers the benefit

Both types of these plans offer great benefits if used correctly, but choosing the right plan can be confusing.  Reach out to your Wealth Advisor to review your current insurance and benefits to see if either can be of use to you or your family.