Which is better a flexible spending account or a health savings account?
The answer to which is better between a health savings account or flexible spending account depends, unfortunately, on the specifics in which they are setup. However, it is relatively simple to determine which is better an FSA or an HSA.
First, you’ll want to understand what an FSA vs an HSA looks like.
When FSA Is Better Than HSA
An flexible spending account, or FSA has many advantages over paying for medical expenses out of your own pocket. However, it has only one real advantage over a health savings account, or HSA. The only eligibility requirement for having and using an FSA is that your employer offers one. It doesn’t matter what kind of health insurance plan you choose, or whether that plan has a high deductible.
In order to have an HSA, you must have a qualifying high-deductible health insurance plan. The reality is that the deductibles aren’t necessarily that high, and in fact, may be close to the deductibles on other health plans. But, if you don’t qualify for an HSA, then a FSA is better than an HSA.
The only other advantage of an FSA is that generally, the whole balance of your account is available to you immediately, even if you haven’t made all the contributions yet. In other words, if you setup a salary deduction of $2,400 for the year, you can use the whole $2,400, even if it has only been four months, and you’ve only contributed $800. (The rest will be paid back by your deferrals over the course of the year.)
The only other advantage of an FSA is recording keeping. With an FSA, you submit claims with receipts to get reimbursed for your expenses. With an HSA, you just use the money. If the IRS ever comes asking, you have to have receipts to prove that you spend the HSA monies on medical expenses. So, it’s a lot easier to get your money from an HSA than an FSA, but you don’t have to keep the records once they are submitted for an FSA.
Some banks offer record keeping as part of the HSA account.
When HSA is Better Than FSA
If you qualify for a health savings account, or HSA, then an HSA is better than an FSA in almost every situation. The only time that won’t be true is if your employer has done a poor job of setting up your options.
There are three major differences between an HSA and FSA, and they favor the HSA in most cases.
First, an HSA balance is yours to keep forever. An FSA must be used during the same year contributions are made, with a possible 2 1/2 month extension, but only if your employer allows it. An HSA balance can be carried over from year to year.
HSA Balance If You Change Jobs or Health Plans
One concern some people have is what happens to your health savings account (HSA) if you quit, change jobs, or change health insurance plans. The answer is nothing.
An HSA account is your own account, in your own name, much like an IRA account, or even your 401k account. If your circumstances change such that you no longer qualify for an HSA, then you can no longer make contributions. You can, however, continue to spend any money that is already in the account.
Contributions are made pretax, and this is a huge advantage, however, pretax contributions can also be made to an HSA if your employer allows it. Even if not, HSA contributions are deductible above-the-line, so the net result for almost everyone is the same when it comes to your income taxes.
How to make HSA contributions can also be an enormous advantage over how you make FSA contributions. Flexible spending account (FSA) contributions must be made by salary deduction. You also have to decide how much to contribute for the entire year before the year starts, usually during your open enrollment period. In other words, you literally have to guess how much money you will need. Guess to high, and you’ll be trying to spend down your account at the end of the year. Guess too low, and you’ll run out of money and have to pay your expenses without any tax-advantages at all.
Some employers offer to make pretax contributions to your HSA. These contributions will be the same, as above. However, many HSA accounts allow additional, ad hoc, contributions at any time. The advantage is that you can contribute when you know expenses are coming.
For example, with an FSA, you have to estimate your expenses. Perhaps you plan for six doctor visits, some prescription drugs, and your monthly chiropractor visits. Once that number is set, it cannot be changed.
Now, if four months after open enrollment, you find out that you need a minor surgery, like hernia surgery, or something with the eyes, or whatever you like. That extra expense was unplanned, and you’ll have no way to pay it with pretax salary deductions. But, with an HSA, you can make an extra $1,000 (or whatever amount) at anytime. Make the contribution in March, have the surgery in April, and pay the bills when the start arriving in May, all with money that will be an above the line tax deduction.
It’s like being able to deduct all of your medical expenses, without having to make the 10% threshold. Plus, the deductions occur above the line, so they lower your adjusted gross income for things like the child tax credit, IRA destructibility limit and other tax deductions, credits, or phaseouts tied to your income.
HSA Contribution Limits 2016 and FSA Contribution Limits 2016
Both medical savings accounts limit how much you can contribute each year.
For 2016 HSA contribution limits are $3,350 for an individual, or $6,650 for families.
The 2016 FSA contribution limit is $2,550 per FSA account, which is much lower, especially for families.
What Expenses Can HSA and FSA Cover?
This is one area, where comparing HSA and FSA is easy. Both accounts use IRS Publication 502 to determine what an eligible medical expense is. In other words, the two plans are the same. If you can use an FSA to cover something, then you can use an HSA to cover it as well.
You Can Invest HSA Money
Frankly, as a former financial advisor, I would tell you not to bother investing your HSA money. You never know when you will need it, and liquidating funds during a downturn could leave you with much less money that you contributed.
Instead, invest extra funds elsewhere, a Roth IRA if you want tax advantages, a regular brokerage account if not. Typically the small amounts here won’t be worth investing. Unlike an IRA account where the small annual investments will grow untouched for decades, the money you invest here will flow into and out of the account as you use it for your medical expenses.
In short, the HSA is better than an FSA for most people, assuming you have the health plan to qualify for it. If you prefer a different health plan, or have no other choice, then use the FSA. It’s almost as good, and still much better than paying for medical bills without any tax advantage at all.