Individuals while shopping for health insurance come across several choices that often confuse and prevent them from making informed decisions. People are often seen confused between a Flexible Spending Account and a Health Savings Account. Perhaps, there are many similarities between the two, but there are some differences too, which people need to carefully understand to maximize the benefits of the plan they choose.
Objectives of HSAs and FSAs
The federal government has come up with Flexible Spending Accounts and Health Savings Accounts to help employees with tax benefits that help them reduce medical expenses cost. Both the health savings account and a flexible spending account are tax-advantaged accounts, allowing people to specifically save for healthcare expenses. People with ongoing medical care needs have the burden of increasing medical costs, especially with the coverage and deductibles changing every year. Thus, employees are required to cover more of their expenses, and they need to find ways to cut costs that have become a priority.
What are HSAs?
Unlike the typical savings accounts, Health Savings Accounts are available only to people having a high-deductible health plan, or HDHP. The government every year determines the minimum deductible amount that a plan may have to qualify as an HDHP and maximum contribution that an individual can contribute to an HSA. For the year 2020, if an individual has an HDHP, then he/she can contribute to an HSA up to $3,550 for self-only coverage and up to $7,100 for family coverage. The fund accumulated in the HSA, if not spent roll over year to year. With an HSA, people may earn non-taxable interest or other earnings.
What are FSAs?
Flexible spending accounts are a part of a benefits package offered only by employers, as individuals cannot open this account on their own. However, the individuals can use the amount saved in the account on medical expenses just like the HSAs. There is a distinct rule for the usage of money in the account, individuals will lose any amount which they haven’t spent at the end of the year unless their employer has opted for a rollover option. Even in the rollover option, the amount that can be rolled into the next plan year is limited to $500 by the IRS. The money saved in an FSAs comes from the individual’s paycheck before deducting tax, in regular increments but these accounts are pre-funded. It means that individuals have not yet paid the full contribution amount selected by them during the open enrollment period, but the amount is available to them to spend at the starting of the year. If any individual leaves the company in the middle of the year, then that employee will require to pay back the spent amount that has not been covered by his/her paycheck deductions yet.
Key Differences between HSAs and FSAs
- Individuals should have a high-deductible health plan to open Health Savings Account, whereas a Flexible Spending Account is offered by the employer.
- HSAs have higher contribution limits, and individuals have the option to double contributions for families, whereas FSA has lower contribution limits with no option of doubling the contribution.
- In HSA individuals have the option to change the amount they contribute in the account at any point during the year, whereas in FSA contribution amounts can only be adjusted at open enrollment or with a change in job or family status.
- Unused amount in the HSA rolls over into the next year, whereas the balance amount in the FSA do not roll over unless the employer allows a rollover, the rollover amount is capped at $500.
- HSA of an individual remains active in case of change of job, and individuals don’t require to be employed to contribute in this account, as long as they have HDHP, whereas in most cases individuals will lose their FSA with a job change.
- Contributions made in the HSA are tax-deductible and can also be taken from an Individual’s pay pretax. Besides distributions and growth are tax-free, whereas contributions in FSA are pretax, and distributions are not taxed.
Individuals cannot have both an HSA and an FSA
Individuals who qualify for an HSA, cannot set up both an HSA and an FSA unless their FSA is only for a limited purpose FSA. Only their employer’s HR representative will be able to tell about this. A limited-purpose FSA works exactly like an FSA, but it can only be used for vision and dental expenses. Individuals who expect to have high medical costs throughout the year, or who wish to maximize contributions to their HSA while minimizing their withdrawals, then a limited purpose FSA for expected vision and dental expenses will turn out to be a smart option.
Whether an HSA or an FSA is Best?
Both HSA and FSA have benefits, as both make managing out-of-pocket medical expenses easier and comfortable throughout the year. Generally, younger and healthier people with few medical conditions or prescriptions are likely to benefit from an HSA and HDHP. Though HDHPs are the cheapest health plans available, these plans have very high out-of-pocket limits that are often more than $16,000 for a family per year. This is far more than individuals are allowed to contribute to an HSA. Therefore, if individuals have high medical costs, they will still have a significant amount to pay out-of-pocket, even if they have contributed the maximum to their HSA. Other health plans may cost more every month, but these plans cover more upfront costs. Due to this, individuals with high medical costs can save more with a generous plan than an HDHP, thereby eliminating the HSA as an option. Though FSAs offer less flexibility than HSAs, FSA will still help people save money and can be paired with any plan, if offered by their employers. Individuals thinking about the amount to contribute should remember a good rule of thumb that they should start with enough amount that will be sufficient to cover their deductible, expected medication costs, and anticipated doctor’s visits.