Perhaps you’ve already done your research on medical and dental benefits, but you’re not sure what other benefits you should enroll in. One of your coworkers suggested an HSA, and your spouse asked you to check whether an FSA plan is available. Which is better suited to your needs?
FSA vs. HSA
FSA is the acronym for a “flexible spending account” (sometimes called a “flexible spending arrangement”). This benefit allows you to set aside pretax dollars from your paycheck for reimbursement for qualified expenses. FSAs are broken down into three categories — health, dependent care and limited purpose.
For health care, money can be used to pay for qualified medical expenses, such as prescriptions, eyeglasses, dental work and even acupuncture. Check out this list of eligible expenses from the IRS to help you decide whether to enroll. Currently, the annual maximum you can save for a health care FSA is $2,600. The full goal amount is available for claims from the first day of the plan year.
For dependent care, your FSA can help you pay for the non-medical care of children under the age of 13 (or any dependents incapable of taking care of themselves, such as an elderly parent) with pretax earnings. The maximum amount you can save annually for a dependent care FSA is $2,500. If you’re married and your spouse has access to a dependent care FSA plan through their employer, you can both save for child care, with a hard total of $5,000 combined. Funds are only available after they are contributed.
For limited purpose, your FSA can help you save for qualified dental and vision expenses. This is a good option if you know you’ll have significant expenditures in these areas during the upcoming year. For example, maybe you plan on having LASIK surgery or need braces.
HSA stands for “health savings account,” and like an FSA plan, this is a pretax benefit. HSAs are different in that they are only available in conjunction with high-deductible health plans (HDHPs). So if your individual or family deductible for medical insurance is lower than $1,350 (individual) or $2,700 (family plan), you will not be able to enroll in an HSA. If you do have an HDHP, an HSA allows you to put aside pretax earnings for qualified medical expenses. The IRS allows you to put aside $3,450 a year if you have an individual plan and $6,900 for a family plan.
Short- and Long-Term Considerations
The decision to enroll in an FSA vs. HSA is personal and completely dependent on your medical and life situation. For example, if you have a family and pay high child care costs out of pocket, a dependent care FSA will allow you to save pretax money directly from your earnings to offset the cost of child care. FSA plans make for an excellent short-term savings option if you anticipate significant spending in the year ahead.
However, FSA funds that go unused each year can expire (be sure to check your plan description to see whether a small amount can be rolled over) and are no longer accessible to you if you leave your company. Plans through ADP TotalSource offer a $500 carryover for those with active FSAs.
With an HSA, your money is never lost. It rolls over year after year and doesn’t expire if you leave your job, so it makes for a great long-term investment. Money can be put aside now and used later on in life (like after retirement!).
HSAs can be a great way to save for retirement. You won’t pay taxes on the cash you contribute nor on money you withdraw for qualified medical expenses. Even better, after age 65 you can withdraw for any reason and pay no taxes. You don’t even have to pay taxes on interest and dividends. That means tax free money in and tax free money out.
It is possible to enroll in both products, but there are restrictions, according to the Finance Buff. If you don’t have an HSA, you can use your FSA to cover many of the medical expenses a health savings account would cover.
Both an FSA and an HSA can save you money and make life easier — it’s just a matter of which can help you more. Watch this video on MyLife@MyTotalSource to help you decide.