Which one is better for me: An FSA or HSA?

Trying to decide between an FSA or HSA? There are key differences you’ll want to understand as well as pros and cons of each account. Depending on your situation, you may also need to include considerations regarding how your spouse’s benefits may effect your options.

Should I choose an FSA or HSA?

The choice may feel overwhelming. The first step is to understand the basics of each account. Once you know that, you can take a closer look at the pros and cons, including limitations or restrictions like how they interact with your other benefits.

Basics of the Accounts

Anytime you use money from one of the accounts, it has to be for IRS approved purchases which generally fall in the category of medical expenses. However, due to the passing of legislation earlier this year under the Trump administration in response to COVID-19, many items can now be purchased under your account that were previously excluded, including over the counter items (think ibuprofen) .

Which pre-tax account you can enroll in depends on what kind of health insurance you have.

^{*For more information see The Basics of a Consumer-Driven Health Plan and 4 Steps to be a Smart Healthcare Consumer.}

Limitations to understand

For HSAs:

You can only enroll in an HSA if you are also enrolled in a qualified high deductible health plan. You cannot enroll in an HSA if you are enrolled in Medicare, are covered by another health care plan that is not a HDHP or if you can be claimed as a dependent on someone else’s tax return.

For FSAs:

You cannot enroll in an FSA if you are enrolled in an HSA, unless you choose a Limited FSA. You can have a Dependent Care FSA at the same time as an HSA. If you do enroll in a Dependent Care FSA, you can only put away $5,000 into the account between you and your spouse. There is a household maximum.

Spous-enomics

If you’re married, you have to pay a bit more attention to who has what.

You can both be enrolled in a General Medical FSA at the same time or you can both be enrolled in an HSA at the same time. But you can’t mix and match. In other words, if you have an HSA, your spouse cannot have an FSA.

If you both want to enroll in a Dependent Care Account, you can, but both of you won’t be able to fund it fully. At most, between the two of you, you cannot put more than $5,000 away in the Dependent Care FSA.

Okay let’s get to pros and cons.

Pros and Cons

FSA Pros:

• No specific insurance is required to enroll. You can have any insurance when you enroll in an FSA.
• You get immediate access to funds. The money in an FSA is available to use as soon as your benefits kick in (usually January 1^st)
• You can pay for your deductible with your funds. You can also use your money to pay for any out-of-pocket costs that you get hit with over the course of the year, including your deductible. (Your deductible is just the amount you have to pay towards your insurance before your insurance actually kicks in.)

FSA Cons:

• You can’t set aside as much. Currently, you’re only allowed to set aside at most $2,750 into your account. If your out of pocket expenses rise above this, you will have to pay directly and will not be able to realize any tax-free savings.
• You might lose the money if you don’t spend it in time. In certain cases, your employer might let you either roll over about $500 into the next plan year or they might give you a little extra time through the first quarter of the next year to use up the money. Regardless of which one of those three options your employer has, the money you don’t end up using by the deadline goes to your employer.

HSA Pros:

• You can set aside more money. With an HSA, you can set aside up to $3,600 every year if you’re on individual coverage (or $7,200 if you have family coverage).
• You might be able to make a catch up contribution. This option is only available to those over the age of 55. An HSA gives a little more flexibility to these people if they got to the savings game late.
• You can pay for your deductible with your funds. Same as an FSA, you can use your HSA money to pay for any out-of-pocket costs, including your deductible.
• Your money can be invested and earn interest, all tax free. Your HSA money is managed by a bank that will often let you invest and then earn interest on your investments. Both the investments and the interest are tax-free, just like the money that you’ve put into the account.
• You can use the money in your HSA to pay for healthcare expenses in retirement. If you’ve been saving with your HSA for a while, you could end up with a nice balance in retirement (think upwards of $60,000), all of which can pay for eligible healthcare expenses in retirement.

Cons:

• You have to pay a higher deductible. That sounds scary at first because it sounds like you might get stuck footing the bill for a lot more money than you want to. However, if you’re not anticipating having any major medical accidents or emergencies, the really nice part about a high deductible plan is that it costs you a lot less per paycheck. What you have to pay per paycheck is your premium. So an HSA allows you to choose a low premium plan. (And remember, you can use the money in your HSA to pay for your deductible.)
• You have to wait for the money in an HSA to grow (just like a regular savings account). If you have a really big expense in the beginning of the year, you probably won’t be able to use your HSA to pay for it. However, if that happens, you can always pay from another source and then later, when you have enough money built up in your HSA, reimburse yourself.

A note on high deductible health plans…

As long as you don’t have any catastrophic injuries that cause you to pay a bunch of money towards your deductible, you’ll have nice low per paycheck costs for health care, and you’ll be building up a solid chunk of change in your HSA that you can use now or later for any health care expenses that are IRS approved.

Related reading

While this overview might have brought some clarity to the differences between accounts, you might still be weighing your options. In order to feel confident in your choice between an FSA or HSA, browse these additional articles.

1. Why an FSA is not the same as an HSA
2. Two easy ways to reduce your premiums
3. HSA investments allow participants to invest in themselves
4. Five great Health Reimbursement Account perks
5. HSA vs HRA: Know the differences for open enrollment