During open enrollment this fall, you'll have lots of important decisions to make, including the best health insurance plan to select, whether to enroll in group life or disability insurance and, if you have the option, whether to utilize a health savings account, or HSA, or flexible spending account, or FSA.
FSAs and HSAs can be an essential element of your health care payment strategy, but there are important differences to know about each.
Let's start with the definitions: FSAs and HSAs are both tax-advantaged savings accounts that allow you to pay for qualified medical expenses, such as doctor's visits and prescription medications, with pretax funds. "They both offer avenues to reduce your tax load to pay for expenses that you're probably going to incur regardless of your situation," says Evan Beach, certified financial planner with Campbell Wealth Management in Alexandria, Virginia.
But FSAs and HSAs differ in important ways, including who's eligible to enroll and when savings expire. Understanding the differences between an HSA or FSA is crucial to picking the best fit for you and your family.
If you're stumped about which one to choose, here's what to know about HSAs vs. FSAs.
What's an HSA?
An HSA, or health savings account, is a tax-advantaged health savings vehicle that allows consumers enrolled in high-deductible health care plans to make tax-free contributions, grow tax-free earnings and use tax-free distributions to pay for qualified medical expenses. "We kind of look at it as a triple tax benefit," says Melissa Sotudeh, certified financial advisor and director of advisory services at Halpern Financial in Rockville, Maryland.
For 2019, the maximum annual contribution allowed in an HSA is $3,500 for an individual and $7,000 for a family. Employees age 55 or older can make $1,000 annual catch-up contributions. Participants may opt for pretax payroll deductions or make tax-deductible contributions independently.
Savings in an HSA are allowed to grow without expiring at the end of the year, unlike money in an FSA, and consumers typically have the option to keep them in cash or a range of investments. You can take an HSA with you when you switch jobs, and your employer may encourage HSA use by depositing some cash into your account at its inception or the start of each year.
An important note is that only health care consumers enrolled in a high-deductible health care plan, or HDHP, are eligible to open an HSA. For 2019, a high-deducible health care plan, which often carries lower premiums, is defined as having a deducible of $1,350 or more for singles and $2,700 or more for families. The maximum out-of-pocket cost is $6,750 for individuals and $13,500 for families. Your health insurance plan may describe itself as "HSA-eligible," but if you're confused about whether it qualifies, talk to your company's benefits department or plan administrator.
Withdrawals aren't taxed unless taken out for a nonqualified expense, in which case they are subject to income tax and a 20% penalty if you're younger than 65. You'll owe taxes but will be spared the penalty over age 65.
What's a Health FSA?
A health FSA, also called a flexible spending account or flexible spending arrangement, is a tax-advantaged savings account, typically funded by pretax salary reductions, from which employees can be reimbursed for qualifying medical expenses.
The maximum amount an employee can save in a FSA in 2019 is $2,700. Like an HSA, an FSA uses the employee's own money to fund health care expenses. But importantly, there is a "use it or lose it" characteristic to FSAs. If a saver doesn't exhaust his balance by the end of the year or a grace period, he loses the money.
"If you miss the mark in calculating what you think you might need, you end up losing your tax benefit," Sotudeh says.
An employee also can't take the FSA account with him when changing jobs.
In addition to a health FSA, employees may also have access to a dependent care FSA for which they can save pretax dollars for qualifying dependent and child care expenses up to $5,000.
What's the Difference Between an FSA and HSA?
FSAs and HSAs have a few major differences to note, including:
-- Who qualifies.
-- When the money expires.
-- Annual contribution limits.
Who qualifies. HSAs are only available to health care consumers in high-deductible health care plans, which have a deducible of $1,350 or more for singles and $2,700 or more for families. Self-employed health care consumers can contribute to an HSA.
Conversely, an employee on any kind of health insurance plan can qualify for a health FSA, as long as it's offered by the employer. Self-employed folks cannot open one for themselves.
When money expires. Funds stored in an HSA can grow tax-free for years, even decades, and may be stored in an investment fund. "I view an HSA as much more similar to an IRA than an FSA," Beach says. Money saved in an FSA expires at the end of the year or grace period. If you don't use it, you lose it.
Annual contribution limits. Both plans utilize the health care consumer's own money, sometimes with a bonus employer contribution, to fund health care expenses. For 2019, the maximum annual contribution allowed in an HSA is $3,500 for an individual and $7,000 for a family. The maximum amount an employee can save in a health FSA for 2019 is $2,700.
Consumers on high-deductible health care plans. Self-employed health care consumers can contribute to an HSA.
An employee can qualify, no matter their insurance, if it's offered by the employer. Self-employed folks cannot open one for themselves.
When money expires
Money saved in an FSA expires at the end of the year or at the end of a grace period.
Annual contribution limits for 2019
The maximum annual contribution allowed is $3,500 for an individual and $7,000 for a family.
Catch-up contributions of an additional $1,000 for those age 55 and older.
The maximum amount an employee can save in a FSA is $2,700.
FSA or HSA: Which Is Better?
When it comes to flexibility, tax-free growth and portability, an HSA wins over the more limited FSA. But the trade-off is that you need to enroll in a high-deductible health care plan, and experts note that an HDHP is not the right choice for everyone since it often comes with large deductibles and steep out-of-pocket medical costs.
While a high-deductible plan typically works for healthy young people and health care consumers with strong savings and robust cash flow, it might not be right for you if you tend to visit the doctor often, typically have high medical bills or need to maintain health insurance that lets you visit a specific network of medical professionals. You'll need to calculate and compare the various deductibles, copays and benefits associated with the health care plans on offer, plus account for any potential employer HSA contribution, before choosing the best option for you.
So when choosing between an FSA and HSA, start with your insurance needs and work toward your health savings account requirements from there. Beach references the old saying "Don't let the tax tail wag the investment dog," meaning don't let tax repercussions dictate your investing decisions. The same thing applies here, he says. Choosing the best health insurance plan is essential. "Don't let the HSA tail wag the health dog," he says.
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