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HSA and FSA Pros and Cons

July 24, 2018 | By Emma Frost

Open enrollment time is approaching sooner than you might think. Whether you’re starting at a new job or you’re thinking about changing your enrollment status, there are several factors to consider. Most people are familiar with a 401K and other plans like it, but two big ones that don’t get enough attention are HSAs and FSAs, but how does someone new to these financial tools make any sense of the alphabet soup of benefits? Check out these key similarities and differences between a health savings account and a flexible spending arrangement, and how using them effectively could help you save.

What They Have In Common

At first glance, HSAs and FSAs are very much alike – you can use both to save tax-free income toward routine and unforeseen medical expenses. Both allow you to set cash aside for qualified expenses like copayments, monthly prescriptions, and deductibles and will generally provide you with a card to use as desires. Your company may even contribute to your savings, and both plans have their own tax benefits, although they do have certain differences. But while signing up for either is always a smart choice, it literally pays to make an informed decision about which one’s right for you.

Contributions

There are also some pretty big differences between the contributions you can make to each of these plans that are worth considering before making your decision. You don’t want to find out later that the flexible spending account to be less flexible than you’d anticipated.

HSA Contributions

  • $3,450 cap for individuals, $6,900 for families
  • Tax-deductible contributions, tax-free growth/distributions
  • Contribute what you can/want throughout the year
  • Unused balances roll over into the next year

FSA Contributions

  • $2,650 cap
  • Pretax contributions, untaxed distributions
  • Fixed contributions adjustable at enrollment, change in employment/family status
  • Unused balances are usually forfeited unless otherwise specified

When you know you’re going to need every penny later and you can handle making the regular contributions without using installment loans to bridge the gap, an FSA might be right for you. But for greater freedom over how much you contribute and when, an HSA might be a better choice, especially if you’re unsure about whether or not you’ll use it. If you’re stuck between choosing an FSA and an HSA, take a close look at what you can and can’t do with each to determine which one lets you contribute in the way that works best for you.

Your Relationship to Your Employer

Both FSA and HSA plans allow your employer to contribute, but in most cases, when you leave a job, you leave your FSA behind as well unless you have benefit continuation through COBRA or some other insurance provider like it. An HSA, however, tends to follow you as you change jobs, which is nice if you find yourself in a transition stage in your career.

Eligibility

Another key difference between an HSA and an FSA is that not everyone is eligible, which might make your decision for you. If you have an HDHP (high-deductible health plan), cannot be claimed as a dependent, and don’t qualify for Medicare, you may be eligible for an HSA. An FSA has no eligibility requirement, however; you simply enroll with your employer. And HDHP means you have a deductible of $1,350 or above, but not all plans with deductibles over these limits will qualify – just be sure to clarify this with your insurer before completing the enrollment process.

The Best of Both Worlds

You usually can’t benefit from both an FSA and HSA, but there is a way to take advantage of the benefits of both plans with a “limited purpose” FSA. If you’re expecting high medical costs this year including vision and dental, this might be a way to make sure all your bases are covered. That way, the limited FSA can take care of your vision and dental, and you can still max out your HSA contributions in case you should need them. Talk to your HR representative to find out if your company offers a limited FSA plan to get the best of both worlds.

Which Plan Is Right For You?

Both type of plans help you manage your out-of-pocket medical expenses with year-round contributions, but they both have their specific benefits. Opting for an HSA is a safe bet if you qualify – the limits are higher, and contributions carry over from year to year and job to job. But if you don’t qualify, an FSA can still help you save big, especially if you’re expecting regular medical expenses throughout the year. Start thinking about it in terms of how much you can contribute - budget enough to cover your deductible, a few visits to your doctor’s office, and what you expect to spend on medication. And if you have questions, don’t be afraid to ask your HR department. They might be able to provide you with valuable insight about your benefits and how to use them most effectively.