Consumer-driven healthcare plans are becoming more common, even with large employers who pay for some or most of their employees’ healthcare costs. These health plans are the kind that allow consumers to make more of their medical spending decisions. They also place more of the onus of paying for those decisions on the consumer.
While these healthcare plans are often ultimately cheaper for the consumer, they can involve more up-front costs. That’s where options like flexible spending accounts (FSAs) and health savings accounts (HSAs) come in. As more employers and independent health plans offer consumer-driven healthcare plans, they also offer these options. While some employers offer one or the other, it’s increasingly common for them to offer both.
So, if you’re faced with the decision between using an FSA and using an HSA, which should you choose? It really depends on the plan available to you and on your particular needs.
Before we can discuss which of these plans is best, we need to go over some of the basic rules for each individually, as well as rules for using them at the same time. You can view our complete guides to FSAs and HSAs for more of the details on each. Here, though, is a brief rundown of the rules involving these accounts.
|Eligibility Requirements||Must have a qualifying high-deductible health plan (min. $1,300 self-only/$2,600 family deductible).||No eligibility requirements, as long as your employer offers one.|
|Contribution Limit||$3,350 for self-only coverage/$6,750 for family coverage (for 2016).||$2,600 (whether single or family).|
|Rollover||Unused balances roll over indefinitely and follow you to new employer/health plan.||Use-it-or-lose-it with some rollover exceptions.|
|Contributing||Contributions can be make pretax or post-tax. If made post-tax, they are tax-deductible.||Contributions are pretax.|
|Growth||Some plans have investment options. All plans grow tax-free.||No growth potential.|
|Distributions||Tax-free distributions for any qualified medical expenses.||Distributions are tax-free for qualified medical expenses or certain dental/vision expenses for a limited-purpose account.|
|Changing Contribution Accounts||Can change how much you contribute at any point during the year, or catch up on contributions at the end of the year.||Contribution amounts can be adjusted during employer's open enrollment or with a qualifying change in employment or family status.|
Now, what about the rules for using these two accounts together? Here’s where things can get really hairy.
I actually ran into this issue when trying to figure out how to mesh my health plan and my husband’s health plan together. My employer offers a good plan with a relatively low deductible, but I can only carry myself and my daughter. It doesn’t qualify for an HSA, but I can use an FSA. My husband’s plan is a high-deductible option with an HSA.
When I started researching our options, I found that the funds in my husband’s HSA could actually be disbursed for allowed expenses for myself or our daughter. This was true even though we weren’t even on his healthcare plan.
Digging a little further, though, I found some caveats. For instance, my husband could not open an HSA legally if I had an FSA. Because an FSA can also be used for a non-covered spouse’s medical expenses, it would disqualify my husband from opening an HSA.
Confused yet? Here’s the bottom line:
- You cannot have both a general medical FSA and an HSA that could potentially cover the same person, even if the FSA is through one spouse’s plan and the HSA is through another spouse’s plan.
- You can, however, have a limited-purpose FSA operating at the same time as an HSA. Limited-use FSAs come in several types. The most common is an account that covers only vision and dental expenses, not other medical care.
- These rules also apply even if your employer offers both and FSA and an HSA attached to the same healthcare plan. You’ll have to choose one or the other, or turn your FSA into a limited-use plan.
The General Benefits
If the rules about HSAs and FSAs are so complicated, why bother with them? Well, any time you can save money tax-free, you should take advantage! Saving through an HSA could save you quite a bit of money in the long run.
For instance, according to this calculator, if you and your spouse make $80,000 a year and max out your HSA with a $5,800 contribution, you’ll save $1,450 in taxes. I don’t know about you, but I could find a few things to do with an extra $1,450 this year.
You could expect similar per-dollar savings with an FSA, too, as it’s also a pre-tax contribution. However, its lower contribution limits mean that you won’t save as much in a year if you max out the account.
One other benefit that I personally find helpful is that they’re a way of forcing yourself to save for medical expenses. If you’re not a great saver yet, consider an FSA or HSA as a way to begin. Your employer will typically take contributions out of your paycheck, pre-tax. Since that money never hits your bank account and can only be used for medical expenses, you’ve forced yourself to save for the inevitable.
Comparing the Options
Because the benefits of HSAs and FSAs are very similar, you’ll want to look at their possible pitfalls when trying to decide between them.
For the HSA, the main pitfall is that you must have a high-deductible health plan to qualify for one. For 2017, this means that your deductible needs to be at least $1,300 for self-only coverage or $2,600 for family coverage. If your health plan doesn’t meet those requirements, you’re out of luck with an HSA.
The FSA has another pitfall, though: it doesn’t roll over. With an HSA, you can roll any unused funds over from year to year indefinitely, and take them with you when you change employers or health plans. With an FSA, though, it’s a use-it-or-lose-it proposition.
Be sure to check your plan’s specific rules, as they vary. With some plans, you can only make claims for that year’s expenses on the account. With others, you get a bit of a grace period. Here are some examples of different ways your FSA plan might work:
|No Rollover||$0||Must make all claims by the end of the year, for that year's qualified expenses.|
|Claim Grace Period||Varies||Can make claims for up to 2.5 months after December 31, but only for expenses from that calendar year.|
|Grace Period||Varies||Can make claims for expenses incurred up to 2.5 months after December 31.|
|Limited Rollover||Up to $500||Can roll over up to $500 of balance into next year's FSA plan.|
One more potential FSA pitfall is that you’re locked into annual contributions once you make your open enrollment decisions. Unless you have a qualifying event like getting married, having or adopting a baby, or changing employment, you can’t change your FSA contributions per paycheck.
Which is Best?
If you qualify for a health savings account with an HDHP, it’s almost always your best option. With the ability to contribute more money, roll funds over indefinitely, and spend money on the same expenses, you really can’t beat it.
This is the direction my family decided to go. Since we couldn’t use both savings account options, we decided to nix my FSA and go with his HSA. We’re locked into a smaller contribution limit, since my husband is on a single plan. But it’s still a higher limit than with an FSA, and we can roll over anything left at the end of the year.
What if an FSA is your only option? Take it! Just be extra careful when calculating probable medical expenses for the year. Sure, you might save too little and wind up paying for some expenses out of pocket and lose out on the tax savings. But, that’s better than contributing money that you don’t use and just having it vanish at the year’s end.
Using Them Together
What if you have both options available to you? Consider using them in tandem. Remember, though, you can only do this if you opt for a limited-purpose FSA. In this case, you’ll need to figure up how much you’re likely to spend on vision and dental expenses for your family in the year. Contribute that much to your FSA, and the rest to your HSA.
What can you pay for using your limited-purpose FSA? Here’s the short list:
- Dental care
- Mouth guards
- Vision exams
- Contact lenses
- Contact solutions and supplies
- LASIK eye surgery
- Preventative care not covered under your health care plan
- Prescriptions related to dental, vision, and preventative care
This is actually a great option, especially if you know your kid needs braces or you’re planning to get LASIK surgery this year. In this case, top up your FSA, and then max out your HSA for the ultimate health savings benefits.
Even if you don’t think you’ll use all $5,800 saved in your HSA for the year, you can look at this as a long-term, tax-free savings option. This is especially true if you’re already maxing out your employer-sponsored retirement options.
Since you can roll your HSA over with tax-free interest until retirement and beyond, look at it as your first funding option for retirement healthcare expenses. This lets you hold on to the balance of your other retirement accounts for other expenses.
Using a limited-purpose FSA as part of this plan only means that you leave more of a balance in your HSA. Since your dental and vision expenses are covered out of your FSA, you’ll touch less of your HSA balance, leaving it to grow and become even more useful over the years.
As with any of these health-related plans, the specific rules will depend largely on how your employer has set up the plan or on how your single-payer healthcare plan organized. Be sure you understand all the rules and caveats before you sign up. And, check up on the latest rules on HSAs and FSAs before you make your final choice.