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FSA vs. HSA: How to Work Them to Your Advantage

With premiums, deductibles, in-and out-of-network coverage, and copays, it can be tough to stay on top of your health insurance and health care expenses. One thing that can help is getting the most out of flexible spending accounts (FSAs) and health savings accounts (HSAs).

Both FSAs and HSAs help you put some money away for health care expenses and save on taxes, but they work in different ways. Here’s a breakdown of what they are and how you can use them, so you can decide whether either or both, are the right fit for you.

What is a health savings account (HSA)?

Kirsten Flint, an employee benefits communication specialist with Banner Health in Phoenix, AZ, explained that an HSA is an account you can use to save money that you can use to pay future health care expenses. You don’t pay taxes on the contributions to your HSA. And as long as you use the money to pay for qualified medical expenses, you don’t pay taxes when you withdraw the money, either. Qualified medical expenses include things like doctors’ visits, dental care, hospital stays, lab tests and more. 

There’s no requirement to use the money in your HSA in a certain time frame. So, if you’re healthy and your medical expenses are low, you can build up a health care emergency fund that will be there for you if you need it down the road. Plus, you can invest your HSA funds in the stock market, mutual funds, or other investments, the same way you invest in a 401k.

To qualify for an HSA, you need to be enrolled in a high-deductible health plan (HDHP). For 2024, plans that are considered high deductible have a $1,600 deductible for an individual or a $3,200 deductible for a family. These plans also have to have annual out-of-pocket expenses, not including premiums, of no more than $8,050 for individuals or $16,100 for families.

Your employer might offer an HSA along with a high-deductible health plan. If they don’t, you can open an HSA on your own with a bank or financial services firm.

Of course, no one knows what the future holds. But if you’re healthy and don’t foresee any medical problems in the near future, choosing a high-deductible plan and saving money in an HSA might be a good option. If you’re considering changing health plans, you can look over your health spending for the previous year and calculate what similar costs would be under a different plan and decide if a high-deductible plan makes sense.

There’s no minimum contribution or balance for an HSA, but there’s a maximum contribution limit or amount you can contribute per plan year. For 2024, you can contribute up to $4,150 to an HSA as an individual or $8,300 as a family. If you invested the maximum amount over the course of your career and stayed healthy, you could have several hundred thousand dollars available tax-free for medical expenses when you retire. You can also withdraw this money after age 65 for other, non-medical reasons—in that case, you’ll pay taxes at your standard rate.

What is a flexible spending account (FSA)?

An FSA allows you to use pre-tax dollars to pay for eligible medical expenses. Since you don’t pay taxes on this money, you save the amount equal to the taxes you would have paid. Your employee withholds the money, and you can use it when you need to. “An FSA can help you save significantly on health care costs. Don’t think of it as money deducted from your paycheck—think of it as money added to your wallet,” Flint said. 

You’re eligible to participate in an FSA if your employer offers one. Some employers contribute FSA funds for their employees. You can put a total of $3,200 in an FSA in 2024. If you leave your job, you lose the money left in your FSA (with some exceptions).

With an FSA, you need to spend the money by the end of the year—otherwise, you lose it. It’s a short-term savings account, not an investment account like an HSA. So, it’s crucial to calculate how much you think you’ll need for the year and to contribute that amount or less. 

There are a lot of costs you can cover with your FSA money:

  • Deductibles
  • Copayments
  • Coinsurance
  • Dental care (not including teeth whitening or cosmetic treatments)
  • Glasses and eye care
  • Hearing aids
  • Chiropractic care
  • Orthodontics
  • Many medications
  • Primary care visits
  • Medical equipment and supplies such as crutches, bandages and blood sugar test kits
  • Other IRS-approved medical and dental expenses

[To learn more about what may be covered by your FSA, read "7 Things Covered by Your FSA That Might Surprise You''].

Which one is best for me?  

With an HSA, you put away money in your own account. You can use it to pay for medical expenses in the future. If your health care expenses are low, you can invest this money until you need it—there’s no requirement to use it. With an FSA, your employer holds the money for you and you need to spend it by the end of the year. If you don’t, you forfeit it. Both types of accounts give you tax savings.

In some instance, you might not have a choice between an HSA and an FSA — the decision might be made for you based on your work situation and your health insurance deductible.

If you have a choice and you are healthy, many people prefer an HSA, since you can invest the money and you’re not required to spend it by the end of the year. But you need to have a high-deductible health insurance plan to qualify for an HSA. If you don’t, you might choose an FSA. With rare exceptions, you’re not allowed to contribute to both an FSA and an HSA. 

Your human resources manager or financial advisor can help you figure out the best ways to pay for your health care expenses based on your situation.

The bottom line

If you’re looking for ways to save money on your medical expenses, consider saving in either a health savings account or a flexible spending account. They both give you tax-free ways to pay for a wide range of health care costs. 

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Updates were made to this article on October 6, 2023.

Health Insurance Wellness