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I recently started a new job and am choosing my health insurance benefits. It looks like I have the option of using a health savings account (HSA) or a flexible spending account (FSA) to set money aside for medical costs. But I don't know which is better, and the language in my benefits paperwork is confusing. Can you help?
Setting aside money for health care costs is a savvy move, but your confusion is understandable. Choosing the right health benefits can be tricky, and with several key differences between HSAs and FSAs, it literally pays to get this decision right.
Both HSAs and FSAs allow employees with health insurance to set aside money for health care costs referred to as "qualified expenses," including deductibles, copayments and coinsurance, and monthly prescription costs. Sometimes employers will also contribute funds to these accounts. In most cases, you receive a debit card for your account and can use it to pay for qualifying expenses throughout the year. Both types of accounts have tax benefits, too, although those benefits aren't the same.
In general, electing to sign up for an HSA or FSA is smart. Knowing which one to select and how to get the most out of it will take some education.
Are you eligible for an HSA?
Health savings accounts are not available to everyone. This is the first key difference, and if you aren't eligible for an HSA, it makes your decision much easier. Only people who have high deductible health plans, or HDHPs, can select an HSA.
For 2015, an HDHP is defined as health insurance with a deductible of $1,300 or more for an individual or $2,600 or more for a family. To qualify for an HSA, this HDHP must be your only health insurance plan, you must not be eligible for Medicare and you cannot be claimed as a dependent on someone else's tax return.
Important differences between FSAs and HSAs
As you can see in the following table, there are several additional differences between these accounts. Things like your flexibility in contributing, the ability to keep your unused balance and additional tax benefits make HSAs the wisest choice if you have the option. Still, either account stands to save you money and make budgeting for medical costs easier.
|Health savings account (HSA)||Flexible spending account (FSA)|
|Changing contribution amounts||
|Connection to employer||
|Effect on taxes||
You cannot choose both, unless ...
If you qualify for an HSA, you cannot elect to set up both an HSA and an FSA, unless the FSA is a "limited purpose" FSA. Your HR representative will be able to tell you if this is the case at your new job.
A limited purpose FSA works like a regular FSA but can be used only for vision care and dental expenses. If you expect to have high medical costs throughout the year, or want to maximize contributions to your HSA while minimizing your withdrawals, using a limited purpose FSA for expected vision and dental expenses could be a smart choice.
Which should you choose?
Both accounts have benefits that can make managing your out-of-pocket medical expenses easier throughout the year. But you should opt for an HSA if you qualify, if for no other reason than the limits are higher and you can carry over your contributions from year to year. If you don't qualify, sign up for the FSA.
A good rule of thumb as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs, anticipated doctor's visits and any planned treatments or surgeries. Also, don't be afraid to ask your HR representative as you come across questions; you can't be expected to know all of the ins and outs of your new benefits.