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Updated on Wednesday, February 10, 2016
If you’re in the position of having both a Flexible Spending Account (FSA) and a Health Savings Account (HSA) available to you, you might be wondering which way you should go.
Most consumers don’t totally understand account-based health plans, including HSAs and FSAs, according to a survey by health care and benefit payment firm Alegeus Technologies. Case in point: Only half of FSA holders passed an FSA proficiency quiz, and just 30% of HSA holders passed an HSA proficiency quiz.
If you aren’t sure which account is the best pick — or even what they can do for you — here’s a breakdown of your options.
What’s a Health FSA?
A health Flexible Spending Account is an employer-sponsored medical savings account into which you can contribute pre-tax dollars that you can use toward qualified health care expenses. This generally includes deductibles, copayments and qualified medical expenses that your insurance doesn’t cover, such as prescription medication, contraceptives and orthodontia.
In 2016, you can contribute as much as $2,550 to an FSA.
If your employer offers an FSA — and a majority do — signing up during open enrollment (usually in the fall) is easy, and setting aside funds pre-tax lowers your taxable income, which means you pay less in taxes overall.
The money you contribute to an FSA must be used by December 31 of the contribution year, unless your employer offers either a grace period (in which case you must use all funds by March 15 of the following year) or a $500 carryover option, in which you can roll over up to $500 in unused funds to the next FSA year. Otherwise, the unused funds are forfeited to your employer.
This means you must be fairly accurate at guessing what your healthcare expenses will be in the future, which isn’t always so easy. And you can only change how much you contribute to your FSA during open enrollment, or after a life change (such as a marriage or birth of a baby) or change in employment.
FSAs are employer-specific. If you change jobs, you’ll generally lose your FSA.
What’s an HSA?
A Health Savings Account is a medical savings account into which you can deposit pre-tax money, available to consumers enrolled in an HSA-qualified high-deductible health plan. Like an FSA, the funds can be put toward out-of-pocket health care expenses.
In 2016, the contribution limits for HSAs are $3,350 for individuals and $6,750 for families.
The money you put into an HSA can stay there until you use it — no end-of-year deadline. You can save now and pay for medical costs in 20 years if you wish. To make high-deductible health plans (and accompanying HSAs) more enticing to employees, many employers sweeten the deal by contributing some amount to the HSA annually — an average of $515 per employee in 2014, according to United Benefit Advisors.
You also have the ability to invest the funds in your HSA, ostensibly giving you another way to grow your savings. You won’t be taxed on any earnings or distributions from the account.
You can change your HSA contribution amount at any point during the calendar year. Had an unexpected medical expense? Put pre-tax money into your HSA to cover it.
HSAs are not employer-specific, so you can take your HSA with you even if you change jobs.
Not everyone is eligible for an HSA. You must be enrolled in a qualified high-deductible health plan (HDHP), so if you aren’t, an HSA isn’t an option for you.
For 2016, an HDHP would be self-only health insurance with a deductible of $1,300 or more or family health insurance with a deductible of $2,600 or more. To have an HSA, your HDHP would have to be your only plan, you shouldn’t be Medicare-eligible, and you can’t be claimed as a dependent on anyone else’s taxes.
The Bottom Line
So which should you choose? That depends on your circumstances. If you’re eligible for both, an HSA has more advantages in terms of flexibility, the ability to roll it over year after year, and the chance to invest the funds.
If you’re not eligible for an HSA, and your employer offers an FSA, the choice is easy: Sign up for the FSA.
You can’t have both accounts at once unless your employer offers a limited purpose FSA that could be used to pay for out-of-pocket dental and vision expenses. Your benefits department should be able to tell you whether that’s the case.