HSA vs FSA: Which One Should You Choose?

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Did you know the money you save for healthcare can also save you money on taxes? Health Savings Accounts and Flexible Savings Accounts are two options to lower your tax liabilities and help you pay your medical expenses.

While HSAs and FSAs have many similarities, there are differences too. You’ll qualify for one or the other, but not both.

What is an HSA?

A Health Savings Account is a savings account for people with a high deductible insurance plan through your employer or the Marketplace. The contributions to your Health Savings Account are before tax, so you save the amount you would have paid taxes on the money.

Employers don’t own Health Savings Accounts. However, some health insurance companies offer them with high deductible plans, or you can open your own HSA at a bank or financial institution.

Always read the terms of the account, determine which has the lowest monthly costs, and pay the highest interest. If you invest your HSA funds, ensure they align with your risk tolerance.

How Does an HSA Work?

You can contribute up to $3,850 in 2023 for an individual and up to $7,750 for a family. In addition, HSAs can earn interest, and you don’t pay taxes on the earnings as long as you use the funds for eligible medical expenses. Some accounts even allow you to invest your funds without paying taxes on the earnings.

To be eligible for a Health Savings Account, you must have an insurance plan with an individual deductible of $1,400 or higher and $2,800 or higher for a family. You can’t have an HSA if you’re on Medicare or claimed as a dependent on anyone else’s tax return. 

Unlike FSAs, HSA funds don’t expire. You can roll them over each year without concern. This makes it viable for people preparing for the future. That great thing about this is that, if you have a large unexpected medical expense a few years later, your HSA funds can help pay for it.

HSA funds are also helpful during retirement. While you can’t contribute to a Health Savings Account on Medicare, you can use the funds you’ve already saved to pay your medical expenses.

The Downsides of an HSAs

HSAs are tougher to qualify for than FSAs because of the high deductible requirement. Your high deductible plan must be your only plan, AND the plan must be eligible. If you buy insurance through the Marketplace, you’ll see which plans are eligible.

What is an FSA?

An FSA, or Flexible Spending Account, is a savings account for healthcare expenses. It’s tax-advantaged because you contribute funds before taxes and don’t pay taxes on funds withdrawn for eligible medical expenses.

How Does an FSA Work?

An FSA is only available through your employer. In other words, your employer must sponsor your account. You can contribute a maximum of $2,850 as an individual in 2023 or $5,700 per household.

To use your funds, you submit a claim to your FSA administrator, including a receipt for the purchase or expense. Your insurance plan must not cover the amount you submit; you can only submit the amount you owe. If it’s an eligible cost, your administrator will reimburse you.

You can use your FSA to pay co-pays, meet deductibles, pay for prescriptions, and pay for medical supplies. However, you cannot use your FSA to pay insurance premiums.

The Downside of an FSAs

It’s important to know the good and bad sides of FSAs to determine if it’s right for you. The largest downside is an FSA is a use-it-or-lose-it account.

Employers can choose one of the following rules for their employees:

  • All unused funds expire at the end of the year

  • You get 2 ½ months to use them after the end of the year, or you lose them

  • You can roll over up to $570 into next year’s plan

There isn’t a law stating what employers must do, so they have these three options. First, ask your employer how they handle unused funds, so you know how to handle your account.

In addition, if you leave your employer, you lose your funds. Therefore, you cannot take them with you. 

How to Choose Between a HSA and a FSA

Looking at Health Savings Accounts versus Flexible Spending Accounts, they have many similarities, including:

  • Tax benefits (both accounts are tax-free)

  • Limits your annual contributions

  • You can’t have both an HSA and FSA

  • You can use the funds to cover co-insurance, co-pays and to meet deductibles

  • You can use either account to cover ‘other’ medical expenses, such as medical equipment

Typically, if you’re eligible for a Flexible Spending Account, you’re not eligible for a Health Savings Account and vice versa.

HSAs are only for people with high deductible insurance plans, so if you have an HDHP, your only option is an HSA. If you don’t have a health plan that meets the high deductible minimum, then your only option is an FSA.

The only exception is if you open an LPFSA or Limited Purpose Flexible Savings Account. The LPFSA is only for dental and vision expenses and can be helpful for individuals or families with many dental or vision concerns.

Final Thoughts

Health Savings Accounts and Flexible Savings Accounts are two great options to lower your tax liability and pay your medical expenses.

Even if you have insurance, you’ll likely have out-of-pocket expenses. Your HSA or FSA can help cover those costs before taxes. First, assess your insurance policy to determine which is right for you. If you don’t have a high deductible plan, ask your employer if they offer an FSA. 

Work with your administrator to determine how to use the funds and/or make claims, and you’ll save money on your medical expenses just by saving for the future.