Open Enrollment - Page 12 - Health Care Spending Accounts

Open Enrollment
- Page 12
Health Care Spending Accounts
How to decide between an HSA and FSA

By Elizabeth Schuman
Contributing Writer

Trying to decide between a health savings account (HSA) and a flexible spending account (FSA) during your workplace’s open enrollment period? While each approach offers financial benefits, you’ll need to do some homework to decide which plan provides the best answer for your budget, health needs and lifestyle.

Both an HSA and FSA allow people to set aside money, pre-tax, for eligible out-of-pocket medical expenses such as deductibles, co-payments, co-insurance and monthly prescription costs. The differences between the two plans come down to flexibility in making contributions, keeping unused balances and tax advantages.

What is an HSA?

The first thing to know about an HSA is not everyone is eligible. Only individuals who are enrolled in a qualified high-deductible health plan may participate in an HSA. The minimum deductible to qualify as a high deductible health plan is established annually by the IRS. “If enrolled in a high-deductible health plan, the eligible person and/or their employer may contribute funds to the HSA to an annual maximum contribution of $3,450 individual and $6,900 family (2018),” says Michelle Tracy, global benefits manager, T. Rowe Price.

An HSA is like a personal bank account to help you save and pay for covered health care services and qualified medical expenses. If the funds are not used during the year, the balance rolls into the next year. “Once enrolled in the HSA, the insured person may use the funds to cover current eligible expenses or save the money to use for future expenses as the account rolls over from year to year,” says Tracy. “HSAs are considered to be triple-tax advantaged because contributions, interest earned and distributions for qualified medical expenses can be tax-free,” says Tracy.

You can contribute to an HSA as long as you have an active qualifying high-deductible plan and no other health coverage. Of note, you can have an HSA even if you are self-employed, as long as you have an eligible high-deductible plan.

What is an FSA?

The most frequently-offered option through most workplaces, an FSA allows up to $2,650 in pretax dollars to be used for medical expenses. You decide how much to contribute to your FSA account each year, up to the IRS limits. Your employer takes money out of each paycheck, before taxes, and deposits it into the FSA account. An FSA plan may provide a debit card for your account that you can use to pay for expenses throughout the year. The most striking difference between an HSA and FSA is that FSA funds must be used on eligible expenses within the year. While some employers allow up to $500 to rollover into the next year, FSA funds are on a “use it or lose it” basis. FSAs are only offered through an employer and individuals do not need to sign up for a health plan to enroll in an FSA.

Making the decision

While HSA and FSA allow you to manage out-of-pocket medical expenses throughout the year, experts advise people to consider the deductible, expected medication costs, anticipated doctor visits and any planned treatments or surgeries before committing to a health plan.

Exposure to health care costs can be greater with an HSA. “The choice between an HSA and FSA is a multi-pronged decision based on the medical situation you may have or expect, and what you can afford each month or at the point of service,” says John Buergenthal, human resources consultant, Baltimore-based ResourceWorks, Inc. “You need to weigh if you are comfortable with the deductible, the monthly costs and your comfort level with the risk. If you have no medical conditions and a high tolerance for risk, an HSA makes sense. If you have medical conditions that may come up, it may not make sense for you.”

He added that in an HSA, the money belongs to the participant, while FSA contributions are not transferable beyond the plan year or employer. “In an FSA, funds must be used within the year or they are gone. You cannot carry over the funds year after year. If you leave your employer, you also lose the money.”

These health savings vehicles are a boon to employees, who seek to set aside money for health care costs and realize tax advantages. “Employers are developing financial wellness programs as part of their overall wellness strategy for employees,” says Buergenthal.

T. Rowe Price, for example, offers a high-deductible health plan (HDHP) with an HSA, a limited purpose FSA for dental and vision expenses only, and an FSA for employees not enrolled in the HDHP. “An employer might want to offer an HSA as an additional vehicle to help their employees save for retirement as HSA funds can be used for current, eligible out-of-pocket expenses or be carried forward into retirement,” says Tracy.

Above left is a brief chart with key considerations. Before making any decisions, you may want to consult with your HR representative or tax advisor with detailed questions about your specific situation. •