There is nothing more important than your health and the health of your loved ones. It is critical to set aside money to take care of the medical expenses that you will inevitably encounter in your lifetime. Accounts such as FSAs and HSAs help you do this while saving you money with their pre-tax benefits.
These types of accounts have some key differences, however. Here’s what you need to know about FSA and HSA accounts, so you can pick which one is right for you:
What are they?
FSAs and HSAs are accounts that employees can use to set aside money for “qualified expenses,” or health care costs that are often associated with health insurance plans. Such costs include: copayments, coinsurance, monthly prescriptions, etc.
Many times, you will be given a debit card that is linked to your respective account that you can use for these costs as needed.
Since both accounts are helpful for setting aside money for health costs, it is a good idea to open one or the other.
What’s the difference?
FSAs came first, and were started in the 1970s. These accounts are established by employers so their employees can save pre-tax dollars for their health care costs. This means that the employee is getting more for his/her dollar because the earnings are put directly into the account without taking out taxes.
There are limits, of course. For a medical FSA, the contribution limit is $2,500. The limit is $5,000 for a dependent care FSA (think daycare).
HSAs came later, and were designed to ease the pain as health care costs inevitably grew (and continue to grow). Like FSAs, contributions to your HSA are pre-tax, which again saves you money.
HSAs are individual accounts. If you contribute on your own post-tax, which you can, then you deduct those contributions on your taxes on your own. If your employer lets you contribute through a cafeteria plan then it’s automatically reported as pre-tax on your W-2.
Unlike FSAs, HSAs do not need to be set up by an employer. You must be under 65-years-old and have only high-deductible health insurance in order to qualify for this type of account.
The individual limit for an HSA is $3,350 and the family limit is $6,650 for 2015.
Which one’s for me?
The flexibility that you get with an HSA is one of its biggest selling points. It can follow you from job to job, whereas you will often lose your FSA with a job change (unless you are eligible for continuation through COBRA). HSA contributions can be stopped or changed at any time. FSA contribution changes are subject to special rules (e.g., marriage or adoption of a child).
FSAs also have a “use it or lose it” policy, so any money that you do not spend within the year will be lost. HSAs allow this money to rollover.
Additionally, HSAs may be invested like a 401k and FSAs cannot. That is, you can earn money on your HSA contributions by investing them and still use them for qualified medical expenses.
On the other hand, FSAs do not restrict what type of health insurance plan you can have. In fact, you technically don’t need to have health insurance at all to qualify. However, high-deductible health plans are only required for you to contribute to an HSA. Once the money is in an HSA you can still use that money later for an qualified medical expense even if you switch to a low deductible plan.
More married couples with young children tend to lean towards FSAs because they desire a health care plan with a lower deductible. Healthy single people, however, often consider HSAs instead because they are seen as a better investment for the retirement years.
Although the HSA is more flexible in many ways, both types of accounts can save you money with their pre-tax benefits. Talk to your employer and/or health care provider to see which account makes sense for you.
How PrimePay Can Help
PrimePay helps with the administration of pre-tax benefits for your company, including HRAs, HSAs, and FSAs. When you choose PrimePay’s pre-tax benefit plan administration, you receive a dedicated service team, access to our support portal, automated claims processing, and a PrimePay debit card and mobile app.
Please read our disclaimer here.