Comparing a Flexible Spending Account to a Health Savings Account

Health insurance is one of our nation’s current hot topics, especially with the recent health care reform dominating the news. Whether you have individual or group health insurance, chances are good that you have the option of choosing from a high deductible health plan with a Health Savings Account, or signing up for a Flexible Spending Account. Both of these accounts are great ways to save money for your health care needs. But which is best?

Examining Health Savings Accounts

Compare health insurance plans to save moneyA health savings account is a savings account set up for people who are enrolled in a high deductible health plan.(High deductible health plans require a higher out of pocket deductible, but the policies generally cost less per month. You can compare health insurance quotes for high deductible plans and regular plans to see if they are right for your situation).

Contributions to an HSA are made with pre-tax dollars, giving you a nice tax incentive to save for your health care needs. A major advantage to using a health savings account is the money carries over from year to year, so you don’t have to worry about the use it or lose it policy.

Pros and cons of Health Savings Accounts:

  • Pro: Pre-tax contributions.
  • Pro: Funds carry over from year to year.
  • Pro: HSA funds can be invested. Your HSA is similar to an IRA; in fact any financial institution that can handle an IRA can handle your HSA.
  • Pro: Ability to purchase over the counter medications, but that will expire in early 2011.
  • Con: Must have a high deductible health plan to qualify.
  • Con: Some HSA accounts have high annual fees. Be sure to look for low, or no fee HSAs.

Examining Flexible Spending Accounts

A flexible spending account is a savings account set up by your employer for you to use for medical and dental bills, or dependent care. Money is taken out of your paycheck and deposited to your account before payroll taxes are deducted. You won’t be charged monthly or yearly maintenance fees and you’re not charged to use the account.

You have the ability to determine how much money will be in the account throughout the year. You’ll need to try and figure out how much you’re going to need because whatever is left in your account at the end of the year will go away.

Which expenses are covered? A Flexible Spending Account will cover any medical expense considered deductible by the IRS. You can find a list on IRS Publication 502.

Pros and cons of  Flexible Spending Accounts:

  • Pro: Pre-tax contributions.
  • Pro: You have total control over how you spend your money; so long as it is health care or dependent care related (depending on which type of account you open).
  • Pro: Can use an FSA with all types of health care plans, not only high deductible plans.
  • Pro: Can be used for “optional”medical procedures not covered by insurance, such as LASIK eye surgery, non-elective cosmetic surgery, braces, etc.
  • Pro: Can be used for child care or dependent care.
  • Con: Money must be used by end of plan year or you lose it.

Comparing HSA and FSA

Now let’s compare a flexible spending account to a health savings account to see how they match up.

Use it or lose it: A flexible spending account has a use it or lose it policy which is not good when you need the money from year to year, so a health savings account would be better if you have low annual expenses.

Qualifying for the plan: Even if you don’t have health insurance you can still use a flexible spending account. This isn’t the case with the health spending account. You must have the high deductible health plan to have the account.

Which expenses are covered? One last difference is expenses that are covered. The health spending account is for medical expenses only. The flexible spending account is good for both medical and child-care expenses.

Not sure which is best for you? Use both

Comparing a Flexible Spending Account to a Health Savings Account

Choosing the right plan can save you thousands of dollars each year!

You may be able to use both plans if you qualify for them. According to the US Treasury information page, “You can have both types of accounts, but only under certain circumstances.  General Flexible Spending Arrangements (FSAs) will probably make you ineligible for an HSA.  If your employer offers a “limited purpose” (limited to dental, vision or preventive care) or “post-deductible” (pay for medical expenses after the plan deductible is met) FSA, then you can still be eligible for an HSA. ”

If you use both plans, be sure to use all the funds you set aside in your FSA each year or you lose them. Be sure to compare each plan and examine account fees and restrictions before opening an account. Otherwise you may be paying too much fora service you could get free elsewhere.

If you don’t currently use one of these plans, check with your employer during the next health insurance open enrollment season to see if you can save money on your health care costs with one of these plans. You can also use these plans if you have a self-employed insurance plan.

Do you have any tips for the best health plans on what to look out for with these respective plans?

Comments

  1. Christina says

    Perhaps I am wrong – It has happened before a few times – but I recently looked into the HSA /high deductible insurance option because our Wellmark Blue Cross plan continues to balloon in cost, and our family of five is, luckily, quite healthy. I don’t think that you can have both an FSA and a HSA; that is one of the rules. Also, it seems like next year FSA tax-free contributions are limited to $1300. Ouch.

    • says

      Christina, You can have both under certain circumstances, but not in all cases. The best way to determine which plan is best for your family is to run your known expenses, then consider the best and worse case scenarios for each plan. My wife and I did this and ended up going with a high deductible health insurance plan because it offered us a savings of several hundred dollars per month and we don’t have any regular health expenses. We also have enough in savings to cover the high deductible ($6,000), which is another major factor.

  2. says

    This is something that was new to me and I can understand how people would like it. I opted out cause I felt I had no need and barely would ever use it.

    • says

      The FSAs are usually only good if you know you will have medical related expenses, so they aren’t for everyone. A high deductible health insurance plan may be a good idea for some people (especially those in good health and a stable emergency fund) because they usually have lower monthly premiums. But you don’t have to use the HSA even if you have a high deductible health insurance plan.

  3. says

    Good synopsis of the two. I just want to chime in with my personal belief about how we, as a nation, need to be moving to the HSA plans. We will never get healthcare under control so long as the consumer is not responsible for any of the costs. Until the patient has to write a sizable check or pay cash for a doctors visit, we won’t see any real reform or slowdown of medical costs.

    While we technically pay for our current medical reimbursement plans (not really insurance) through lower wages, we don’t see the true costs. This creates an environment where we never question additional tests or negotiate prices. That would all change with a high deductible plan. Costs would start to come down as we looked for the best deal. Also, it might motivate folks to take better care of themselves so it fosters preventative measures.

    Those who argue that people can’t afford that neglect the fact that the monthly premium is substantially below HMO or PPO plans. Also, the HSA allows a tax deduction for the entire amount of the deductible.

    Just thought I would throw that idea out there since the topic was broached.

    • says

      Point taken, Kirk. Many high deductible health care plans that offer HSAs also offer free wellness visits as part of the plan – things like well baby checks, annual physicals, screenings, and other exams, vaccinations, etc. The goal is to get people more proactive about their health because preventive health actions can save everyone a lot of money in the long run.

  4. says

    I think HSAs are a great alternative if your company has that option. If you are self employed you can dictate the rules. However, the advantage counts on you been relatively heathy and also having enough resources in the event something major happens.

    Unfortunately my company does not offer many options – and my insurance is quite expensive. I would jump at the chance to have an HSA. However, keep in mind that annual contribution limits are going lower in the future.

    • says

      I actually dropped my company sponsored plan and went with an individual high deductible health insurance plan. We ended up saving several hundred dollars per month and we have the resources to cover the higher deductible. So in my case, it was worth the research and taking action. It may not work out as well for everyone though.

  5. Dan says

    I have an HSA through my employer – love it.
    Two more pros: Your HSA earns interest tax free, and what you deposit into your HSA is tax deductible (to a limit).
    I agree with Kirk above – HSA’s usually have more patient cost up front, so there’s more awareness of true cost. This in turn hopefully causes people to be a little more thoughtful before seeking medical care for certain issues.

  6. Leah says

    My family”s HSA is the best thing we ever did as far as health care is concerned. For the first time I am reading my plan, understanding what is covered, making sure I am looking for the right price- not just jumping at the 1st thing offered (glasses for my child- local medical facility charges me close to $400.00, online I can get the same thing for $60.00. And the most important thing? Talking to my family about staying healthy, exercise, eating correctly, etc… We feel so much more in control of our health- and yet, this adminstration wants to end HSA.

  7. says

    I am a big fan of FSAs, but as you point out– you need to be careful to use it or lose it.

    One needs to be careful about how one sets aside. I look at last year’s expenses try to identify the recurring expenses and look for expected expenses on the horizon and add the numbers together to pick my number for the coming year.

  8. PK says

    I know for a fact that FSAs do not have to run on the calendar year, but you only have the plan year to use the money. Our plan year runs from 5/1 to 4/30.

    • says

      PK, good point. The two companies I worked with used the calendar year as the policy year.

      Thanks for pointing that out, and I edited the article to reflect the correct information.

  9. Nancy says

    In doing my research, I have found that only individuals with a HDHP (precluding drug coverage) may participate in an HSA and only individuals in a GROUP may participate in an FSA.

    I am a healthy female Type 1 diabetic (5’7″, 125 lbs, work out regularly, watch my glucose levels). I recently exhausted COBRA from a previous employer and my new employer is a small business and does not have a group plan. I have recently taken out an individual guarantee issue plan with drug coverage, but a $2,500 deductible. Apparently the drug coverage disqualifies it as an HDHP….good information to know, but not readily available unless you talk to an insurance professional.

  10. Teatime says

    Is the tax deductable benefit the only real benefit over a normal savings account?? Not sure I have all the info on what the real differences are???

  11. MP says

    Is it possible to pay the insurance premium pre tax? When my employer paid for my health insurance, they paid my insurance pre tax… now I am on cobra and exploring both FSA and HSA through my current employer but I believe they both cannot be used to pay the insurance premium… this does not seem right. Am I missing something here?

  12. Rehan says

    I see online drugstore .com offers FSA eligible items. Can one shop with the remaining balance in lump sum as all that money will be lost by the end of year?

  13. Nick says

    Ryan:

    Thank you for your informative article. I am employed by a single member LLC. As such, I believe I would be classified as self employed. Is there a FSA or HSA that is friendly to someone in my position? I have California Kaiser which is killing me – I cannot change because of existing health conditions. I’m paying $1,000/mo but have a fairly small deductible. Any light you may be able to shed on this would be enormously appreciated. ~ Thank you, Nick

  14. Scott says

    The FlexPlan for health and day care are separate. You can have both but you can’t move money between them and both have the use/lose rule to prevent being used as a tax shelter.

    Many medical expenses which are barely covered by isurance are eligible under FSA. e.g. contact lenses and solutions, prescription eyeglasses, OTC drugs with a prescription (e.g. Prevacid), etc. Also, you can use the entire annual amount starting with claims incurred on January 1, long before the actual witholding has taken place.

    People usually UNDER withhold since they’re afraid of losing the money. They end up with qualifying expenses after the money has run out, losing the tax advantage.

  15. Cindy says

    Question:
    My husband carries our two daughters on his insurance, which is a high-deductible plan. I have a single, work-sponsored PPO plan just covering myself. Is it appropriate for my husband to have a HSA, with the assets used to pay medical expenses for himself and the two daughters….while I have a FSA that covers my out-of-pocket costs? If so, can I use any of my FSA to pay for expenses for my husband or daughters, if their HSA account is empty? Or, to avoid a conflict…should my FSA only be used for my expenses?

    • says

      Cindy, so far as I am aware, you should be able to have and FAS while your husband has the HSA. However, I’m not sure if you can mix or mingle the accounts for people who aren’t on that specific plan. I don’t believe you can, but I don’t know the specific IRS reference. I would err on the side of caution unless you find a specific code that allows it.

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