What’s the difference between a health savings account (HSA) and a flexible spending account (FSA) – and which one is best for you?
Both are accounts you can contribute to tax-free to save on medical expenses such as deductibles, copays, coinsurance and prescriptions. Sometimes, employers contribute funds to these accounts to provide you with further assistance. In most cases, whether you opt for an HSA or an FSA, you receive a debit card to be used toward qualified expenses throughout the year.
Consider Your Eligibility
In general, signing up for either an HSA or an FSA is a smart move, because both offer significant tax benefits. So, how do you decide? Eligibility is a leading consideration.
- HSAs are not available to everyone. You are eligible only if you have a high-deductible health plan (HDHP). In 2018, an HDHP required a deductible of $1,350 or more for an individual and $2,700 or more for a family.
- HSAs also cap the amount you can spend out of pocket in a year for covered services. The cap is $6,550 for an individual and $13,100 for a family.
- To qualify for an HSA, your HDHP must be your only health insurance plan. You cannot be Medicare eligible, nor can you be claimed as a dependent on someone else’s tax return. In any case, check with your insurer before you buy.
Why Not Pick Both?
You cannot choose to set up both types of accounts unless you enroll in a “limited purpose” FSA. This type of account works like a regular FSA, but can be used only for vision and dental expenses. It can be a smart choice if you expect to have high medical costs throughout the year or want to maximize contributions to your HSA while minimizing withdrawals.
- Both HSAs and FSAs have benefits that make managing your out-of-pocket medical expenses easier. 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 contributions from year to year. If you don’t qualify, then sign up for an FSA.
Here are some additional differences between HSAs and FSAs:
- With an HSA, you can change how much you contribute at any point during the year. Contributions to an FSA can be adjusted only at open enrollment time or with a change in employment or family status.
- Unused balances in your HSA can be rolled over into the next year. With some exceptions, you forfeit any unused balance left in your FSA at year’s end.
- Your HSA can follow you from employer to employer if you change jobs, which is not the case with most FSAs. One notable exception is eligibility for FSA continuation through COBRA.
- Contributions to an HSA are tax-deductible but can also be taken out of your pay on a pre-tax basis. Both growth and distributions are tax-free. FSA contributions are pre-tax and distributions are untaxed.
What can Lyons HR do for your business?
The Lyons HR team can provide additional resources on health savings and flexible spending accounts, as well as other benefits. We provide customized, full-service HR management to meet all your ongoing business needs. Contact us today to learn more.