Here’s the thing:
In light of past health care discussions on my blog and the fact that benefit re-enrollment period is up us, I thought I’d address a couple of tax-advantaged medical savings accounts:
- the Health Savings Account and
- the Flexible Spending Account.
Ready for a HSA vs FSA showdown? Strap in!
Who am I to offer up this comparison?
Well, I used a Flexible Spending Account for some time when I was employed and had a nice group health insurance plan.
Over the past couple of years, since becoming self-employed, I’ve learned a great deal about Health Savings Accounts.
Let’s look at what they are and how they can help you.
Health Savings Account (HSA)
The Health Savings Account is like an IRA. You get to fund it with pre-tax dollars and it’s typically administered by a financial institution.
But unlike an IRA, you get to use the funds when you need them (not just in retirement) towards qualifying medical costs.
You also get to decide where the funds are invested. You get a lot of control with this account. Tax savings and growth.
Only certain people qualify. You must be enrolled in an HSA-eligible high-deductible health insurance plan.
Your annual contributions are limited. Check out this chart or visit my post on HSA contribution limits for more information.
Flexible Spending Account (FSA)
The Flexible Spending Account is a pre-tax dollars savings account your company administers where you’re allowed to save up a year’s worth of health care costs.
Most people use it to pay for deductibles, co-pays, and household health care items. It works like this:
At the beginning of the year (or during your benefit open enrollment) you must elect to open the account and save a specific dollar amount.
This account is funded automatically from your earnings at work. Your company will deduct the funds before taxes are calculated (pre-tax).
Throughout the year you’re allowed to spend the dollars you’ve accumulated in the account. The spending must be for qualifying health care costs.
Important: it’s a use-it-or-lose-it type plan. You must spend all the funds in the account or you lose them. Thus, people are normally very conservative with the amount they elect to fund the account.
The effect of using the account is big tax savings. If you normally spend $1,000 on “above coverage” health care costs in a year, you could save around $250 a year by using one of these accounts.
Things you might not have known were qualifying health care expenses (every plan is different, but these oddities are likely qualifying): Hand sanitizer, cold remedies (and other over the counter meds), sunscreen (like Coppertone®), and band aids.
|Must be insured in order to use plan|
|May use funds toward qualifying medical costs only|
|Offered in conjunction with a high-deductible health insurance plans|
|Employers can deposit all or a portion of the deductible to use until the deductible is met|
|May contribute additional tax-free dollars taken from gross income|
|May transfer account if you switch jobs|
|Funds may be used in future years|
|Must declared fixed amount you would like your employer to deduct from your gross income|
|Must spend funds within tax year of contribution|
|Self-employed individuals do not qualify|
|Use funds to pay for daycare|
|Can gain interest depending on the amount placed in the account and the length of time the funds go unused|
|Can not be receiving medicare or be claimed as a dependent|
Contribute to an HSA and FSA at the Same Time?
Unfortunately, the government will not let you contribute to an HSA and an FSA at the same time. Since there are tax benefits to both, some could take advantage of each account. However, there are a few exceptions.
If you are transitioning jobs and have an FSA with your prior employer, you may be able to contribute to both within the same year. If your new employer has an HSA plan you can use your FSA funds and then begin contributing to your new HSA.
For example, let’s say you have $1000 in your FSA and use it for medical expenses by March, you are then able to contribute to your HSA after all of the funds have been used to cover medical expenses.
You may even be able to hit your HSA contribution limit by using the “last-month rule” if you are diligent enough.
You may also be able to contribute to an HSA in conjunction with an FSA if it is a limited purpose FSA. A limited purpose FSA only covers eligible dental and vision expenses, then allowing your HSA funds for medical expenses and savings.
What We Use: HSA vs FSA
Like I said above, we used to use an FSA, which we heavily funded each year for things like baby medical costs and prescription drugs.
However, we no longer qualify for an FSA because I’m now self-employed, Mrs PT is a stay at home Mom, and we can’t get on a low-deductible group health insurance plan.
So now we have an HSA through a local credit union.
Do you use these accounts? How have they worked out for you?