FSA vs. HSA: What’s the Difference?

Shopping for the right health insurance plan is a complicated task, especially if you’re undertaking it by yourself. A recent poll found that Americans believe that shopping for health insurance is as unenjoyable as having a tooth filled or doing their taxes! But that doesn’t have to be the case — as long as you have the right help. A number of free online resources exist to answer consumers’ many health insurance questions. For instance, you may be asking, “What is the difference between a Flexible Spending Account (FSA) and a Health Savings Account (HSA)?” With a bit of information and clarification, you can learn the difference and choose the option that is best for you.

What Is an FSA?

FSAs are accounts established by employers for their employees. They are meant to help employees save money on medical bills. FSAs allow workers to contribute a portion of their pre-tax income to pay for certain healthcare costs, called qualifying expenses. FSA eligible expenses vary from plan to plan, but copayments and deductibles are usually included. Some employers offer supplemental FSAs to cover the needs of employee dependents.

Many people find FSAs useful, but there are drawbacks. FSA contributions typically max out at around $2,500 a year — in 2015, the maximum contribution was $2,550 — and often the benefits do not roll over from one year to the next. In other words, if you don’t use that money, you lose it. You may also pay a 20% penalty if FSA funds are used for non-qualifying expenses, so make sure you check your plan’s list of qualifying expenses carefully.

Tips for FSAs

  • Find out whether funds cover copayments and deductibles
  • Research what other medical costs funds may cover
  • Ask about your maximum contributions
  • Know the penalty for using funds to cover non-qualifying expenses
  • Do not use funds that do not cover qualifying expenses

What Is an HSA?

Health Savings Accounts are also pre-tax savings accounts intended to help cover medical costs, but they play by different rules. Like FSAs, HSAs funnel a percentage of your pre-tax paycheck into an account designed to cover qualified medical expenses, in addition to your insurance. Employers can also contribute funds to your HSA. The contribution rates are higher than FSAs; in 2016, the contribution limit is $3,350 for an individual and $6,750 for a family.

An HSA has significant tax advantages. With an HSA:

  • The funds you contribute come out of your pre-tax income.
  • The interest you earn on the account is tax-free.
  • Money withdrawn from the account is also tax-free as long as it covers qualified medical expenses.

Also, unlike FSAs, the funds usually roll over from year to year, so contributors don’t lose their money. However, like an FSA, an HSA usually enforces a high penalty tax for withdrawing funds for non-qualifying expenses — so be careful how you use it!

Tips for HSAs

  • Research your HSA’s contribution limit
  • Find out whether funds roll over
  • Look at how high your deductible needs to be to qualify for an HSA
  • Determine whether you can afford a high-deductible healthcare plan under the Affordable Care Act

What are the advantages of FSAs and HSAs?

FSAs and HSAs are like medical IRAs, allowing you to save money tax-free against future expenses. And the tax payoffs are significant. They reduce your taxable income, resulting in lower income tax payments each year. They provide a safe means of saving money for health-related expenses — once you’ve put aside the money, you can’t use it for anything except qualifying expenses without penalty, so you’re unlikely to waste it. Under some circumstances, HSAs may allow you to take a deduction on your overall taxes at the end of the year.  And rather than using complex reimbursement procedures, FSAs and HSAs often simply issue you a debit card for you to use while paying for your medical expenses. These accounts are convenient and can save you money.

Do I want an HSA or an FSA?

This is where it gets a bit trickier. If you qualify, an HSA offers a huge advantage in that the funds accrue year after year. In the long run, this can leave you with a substantial nest egg for unexpected medical costs. If you contribute a larger amount to your HSA, the funds may also gain interest that can be tax-free. However, HSAs tend to be restricted to high-deductible health plans. Although enrollment in HSAs has grown 15% on average since 2011, many Americans still don’t qualify.

If you don’t qualify for an HSA, a well-managed FSA can help offset your health costs while offering many of the same tax benefits an HSA confers. There are different types of FSAs, and they pay for a wide range of services; for instance, Dependent Care FSAs can cover child care. These features make them a better choice for some people, despite the fact that FSA funds usually don’t roll over.

Understanding Flexible Spending Accounts and Health Savings Accounts may seem daunting, but HealthMarkets Insurance Agency is here to help untangle the knot. If you have additional questions about your family’s insurance needs, give us a call, 24/7, at (800) 827-9990. With over 3,000 licensed agents and 24 hour a day email and telephone support, we’re always available to discuss your individual and small business insurance options.

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References
http://www.bankrate.com/finance/insurance/health-insurance-poll-1114.aspx
http://www.ebri.org/pdf/publications/facts/1003fact.pdf
http://www.irs.gov/uac/Newsroom/In-2015,-Various-Tax-Benefits-Increase-Due-to-Inflation-Adjustments
http://www.irs.gov/publications/p502/ar02.html#en_US_2013_publink1000178885
http://www.shrm.org/hrdisciplines/benefits/Articles/pages/2016-hsa-limits.aspx
https://www.ahip.org/Press-Room/2014/HSA-Census-Survey/
https://www.fsafeds.com/GEM/#DiffFSA
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