There are some key differences between an employer sponsored Health Savings Account (HSA) and Flexible Spending Account (FSA) that will make one a better benefit choice for you. Both of these accounts are used by employees to set money aside for future medical costs. Those costs can include insurance deductibles, copayments, coinsurance, and prescription costs.
Both account types provide tax benefits and in some cases employers will also make contributions. You usually will be issued a debit card that can be used throughout the year to pay for “qualifying” medical expenses.
The differences are summarized below to help you make the choice as to which one will be better for your own personal situation.
Health Savings Account:
· Only employees who are not eligible for Medicare coverage, who also have high deductible health plans (HDHP) as their only health insurance coverage, and who cannot be claimed as a dependent on someone else’s tax return can contribute to this type of account. For 2016 and 2017, the deductible must be $1,300 or more for an individual or $2,600 or more for a family.
· 2017 contributions are limited to $3,400 ($3,350 for 2016) for individuals or $6,750 for family coverage. An additional 2017 “catch-up” contribution limit is available for participants who are 55 or older on December 31, 2017.
· Participants’ 2017 out-of-pocket expenses are limited to $6,550 for individuals or $13,100 for family coverage.
· Participants can change their contribution amount during the year.
· Unused balances are rolled over and available for health expenses in a future year.
· The account can be transferred if you leave your present employment to work for another employer.
· Contributions are tax-deductible or can be withheld from your pay on a pre-tax basis.
· Any investment returns in your account that are included in any distributions for health expenses are tax-free.
· If you qualify for an HSA, you cannot also have an FSA, unless it is a “limited purpose” FSA.
Flexible Spending Account:
· There are no eligibility requirements.
· Contributions are limited to $2,550.
· Contribution amounts can only be changed during the annual open enrollment period or when employment or family status changes.
· Any unused balances in the account are forfeited at the end of each year of participation.
· Unused balances are usually forfeited when changing to another employer unless you are eligible for an extension under COBRA coverage.
· Contributions are made on a pre-tax basis.
· Distributions for health expenses are received tax-free.
Conclusion:
The Health Savings Account (HSA) will be a more desirable choice for most individuals and families. It’s flexibility for making contribution changes, higher permitted contributions, and ability to keep any unused balance at the end of each year will be more appealing to most participants. The tax benefits and regular contributions that are withheld to contribute to both HSA and FSA accounts do enable participants to more easily budget for and efficiently spend money for future medical expenses.
Greg Tinaglia
Last Updated: 10/09/2016