HSA vs. FSA - What's the Difference?

As December quickly approaches, the window for making changes to insurance plans is closing. This can be a stressful time of year for a multitude of reasons, but the healthcare debacle hasn't helped lighten the load. While we cannot make your decision for you, we will provide you will some information that should help make your options more clear. We'll start will a common confusion first.

HSA vs. FSA

Similarities

Both the HSA and FSA are both accounts that can reduce your income tax liability by allowing you to pay for medical expenses pre-tax. That means if you're in the 25% tax bracket you could potentially save $2000 on taxes by using one or both of these accounts. It's important to be familiar with how each can be used. Both accounts can cover expenses for your family.

Eligible Expenses:

• Copays and/or Deductibles
• Qualifying Prescriptions
• Some Medical Equipment

A full list can be found on the IRS website under Publication 502.

Differences

 

Key Points

• Both accounts offer tax savings.
• You can only have both accounts if your FSA is a limited purpose FSA. This means your FSA can only be used for vision or dental expenses and not for medical expenses as your HSA will cover those expenses. If your spouse has an FSA, this too must be a limited purpose FSA as both the FSA and HSA can be used for family expenses.
• If you sign up for Medicare, you can no longer contribute to an HSA, but may continue to use the account for medical reimbursements tax-free. While HSAs cannot be used to pay premiums for those under 65, you can use the HSA to pay for Medicare premiums.

Scenarios

FSA:

Tom had has heart trouble for the last few years. While he is still healthy enough, he is on various medications to keep his heart healthy. He only needs to go in for a checkup once or twice a year, but the prescription costs climb every year. He chose a low deductible plan to get faster access to insurance benefits and because he typically won't hit a $2,800 deductible. He is only eligible for an FSA. By funding an FSA, he can pay for checkups and prescriptions with pre-tax dollars. Low deductible plans are often best for middle of the road users. These are users who don't regularly hit their deductibles, but have regular medical expenses on top of routine physicals and vaccines.

HSA:

Alice is single and hasn't gotten sick in several years. She chooses the high deductible plan to lower her premiums. Alice can still get an annual physical and a flu shot every year without paying out of pocket. While she knows she is healthy now, she is looking to the future and wants to save for when her healthy may not be as good. By funding her HSA she can save for the future and even start investing with the funds. Her employer will even match her contributions meaning free investing money! Whenever Alice is ready for a family or if she begins to have health complications, she will have a healthy fund saved up for medical expenses or a great additional IRA when she hits 65.

FSA and HSA:

Tina is married with 2 children. Child 1 will need to get braces next year and Tina discovers she will need to have a medical procedure as well. Tina fully funds both her Limited Purpose FSA (LPFSA) and her HSA. The LPFSA is able to cover the cost of braces and any eye exams the family needs, while the HSA will allow her to use pre-tax dollars to pay for her medical procedure. If she doesn't use all of the HSA funds, these will rollover and continue to accumulate for future use.