Comparing a Flexible Spending Account to a Health Savings Account

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Compare health insruance plans to save money
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…

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

hsa vs FSA comparisonA 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. You can even invest the money in your HSA, allowing you to grow your savings over the decades.

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; any financial institution that can handle an IRA can manage 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 can 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 childcare or dependent care.
  • Con: Money must be used by the end of the 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 a high deductible health plan to have the account.

Which expenses are covered? One last difference is the expenses that are included. 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 for a 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?

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Cindy says

    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?

    • Ryan Guina 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.

  2. Gwen Karkaba says

    Hi Ryan,

    My husbands work is switching to high deductible on Jan 1st. Looking at all the FSAand HSA options, we’re still debating on which one will be best.
    My daughter will be getting braces soon, as far as the flex card, will we be able to apply it to orthodontist services?
    Also, if my husband elected to put in a certain amount at the beginning of the year, then wanted to add more money, will he be able to do so?
    The enticing thing about FSA, is that monies are available immediately for any medical services rendered. With HSA, it is what you put into it, correct?
    We’re a family of 5 and healthy. Please give me your input if possible. Thank you!


    • Ryan Guina says

      Hi Gwen, I’m not sure about the orthodontic services. I recommend contacting the respective FSA and HSA providers to verify which medical uses you can use the accounts for. You are correct with regard to the HSA – you can only use it as you put it into the savings. The nice aspect of the HSA is you can carry over the balance from year to year. There is no “use it or lose it” provision that the FSA has. (if you don’t use the funds in an FSA, you can’t carry them over to the next year). I have been using an HSA for several years because it allows us to put the funds into long-term savings if we don’t use them each year. So far we haven’t used our HSA savings each year, so we can invest those funds and pull them out for medical expenses when needed. Or we can let them ride for the long run, and use them as a pseudo-retirement investment account. Here is more info about How to Use Your HSA as an Investment Vehicle. I hope this is helpful.

  3. Jesse Melancon says

    I a retired on Medicare and learned that I do not qualify to set up a HSA. My out of pocked medical expenses are 650 a month. I have a wellness business and a free inspirational website along with rental property. I am considering setting up a LLC to put all of these under one umbrella. Will setting up a LLC qualify me to get a HSA?

    Thanks Jesse

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