What is Healthcare FSA vs HSA?
What is a FSA?
A Flexible Spending Account, FSA, is a pre-tax savings account intentionally used for medical expenses. These expenses could include deductibles, copayments, coinsurance, prescriptions, etc. Some also cover medications, vision, and dental care.
An FSA is typically offered through an employer, in which employees could contribute via payroll deductions using pre-tax dollars, similar to a 401k.
One of the constraints of an FSA is that any unused funds at the end of the year are, unfortunately, forfeited. There are some FSAs that provide a level of flexibility by allowing employees to carry over a portion ($500) of unused funds to the next year. There’s also a grace period, letting employees use funds from the previous year to pay for expenses incurred during the current year.
As the name suggests, this account is intended for people to spend.
What is a HSA?
A Health Savings Account, HSA, is a triple tax-advantaged savings account intentionally used for medical expenses. These expenses could include doctor visits, prescriptions, medications, etc. An HSA is typically paired with a high-deductible health plan.
A HSA is typically offered through an employer, in which employees can contribute via payroll deductions using pre-tax dollars. Withdrawals for qualified medical expenses are also tax-free, adding another tax benefit to a HSA. Additionally, unlike the FSA, funds in a HSA do not expire and roll over to the next year.
As the name suggests, this account is intended for people to save.
This post is about Healthcare FSA vs HSA.
The 5 Pros of a FSA:
1. Pre-tax Contributions
Contributions to a FSA are via payroll deduction using pre-tax dollars. This reduces your taxable income; therefore, lowering your tax liability.
2. Convenient Contributions
As stated above, contributions are made via payroll deduction, so you can set it and forget it!
3. Lower Out-of-Pocket Expenses
Since contributions are made using pre-tax dollars, this means that any expenses covered using FSA funds will also be tax free. Depending on what tax bracket you’re in, this could save you between 10-37%.
4. Wide Range of Expenses Covered
FSAs can be used to pay for a wide range of medical expenses. These expenses include deductibles, coinsurance, copayments, and prescriptions. Some FSAs also cover medications, vision, and dental care.
5. Flexibility
While a FSA’s funds expire at the end of the year, some plans allow you to roll over up to $500 of the unused funds to the next year. This provides some flexibility to unused funds. There’s also a grace period, which allow you to use funds from the previous year to pay for expenses incurred in the current year.
The 5 Pros of a HSA:
1. Tax Benefits
A HSA offers tremendous tax benefits: using pre-tax dollar contributions, tax-free withdrawals, and tax-free growth. Making this account a triple tax-threat.
2. Investment Opportunities
Yes, you read that right. A HSA plan offers the opportunity to invest some of the HSA funds into investments. These could include index funds or mutual funds. So if your investments within the HSA grow, the HSA offers tax-free growth, so you won’t owe taxes on the earnings made in this account.
3. Lower Out-of-Pocket Expenses
Similar to a FSA, since contributions are made using pre-tax dollars, this means that any expenses covered using HSA funds will also be tax free. Depending on what tax bracket you’re in, this could save you between 10-37%.
4. Wide Range of Expenses Covered
You can use the funds for a wide range of qualified medical expenses. These expenses could include doctor visits, medications, dental, and vision.
5. Flexibility and Portability
Unlike a FSA, funds within a HSA can and do roll over from year to year, so there’s no expiration date to the funds within the account. Additionally, even if you change jobs or retire, the HSA is still your account in which you can take with you. So the HSA is yours regardless of your employment situation.
There you have it! To reiterate, the pros of FSA vs HSA are below:
FSA
HSA
- Pre-Tax Contribution
- Convenient Contributions
- Lower Out-of-Pocket Expenses
- Wide Range of Expenses Covered
- Flexibility
- Tax Benefits
- Investment Opportunities
- Lower Out-of-Pocket Expenses
- Wide Range of Expense
- Flexibility and Portability
Interested in learning more about tax advantaged accounts? Check this post out for Roth IRA vs 401k!
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