HSA vs. FSA: Which Health Savings Account or Flexible Spending Account is Right for You?

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

A 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

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?