It’s getting close to open enrollment season for many organizations. Employees will have to go through the annual ritual of choosing the insurance benefits that make the most sense for them. Benefits remain complex, but today’s employees have options that those from previous generations did not have available. While most people are generally familiar with traditional insurance coverage, many people are less familiar with some of the newer options.
Health savings accounts (HSAs) and flexible spending accounts (FSAs) are two tax-advantaged savings accounts that can help you pay for qualified medical expenses. Both accounts offer a number of benefits, but there are also some important differences between the two.
What is a health savings account (HSA)?
An HSA is a savings account that can be used to pay for qualified medical expenses, such as deductibles, copays, coinsurance, and prescription drugs. HSAs are only available to individuals who have a high-deductible health plan (HDHP). HDHPs typically have lower monthly premiums than traditional health plans, but they also have higher deductibles and out-of-pocket costs.
What are the benefits of an HSA?
Using an HSA has a number of benefits, including:
- Tax savings: Contributions to an HSA are made with pre-tax dollars, which means that you lower your taxable income. Earnings on HSA investments also grow tax-free. You can withdraw funds from your HSA tax-free to pay for qualified medical expenses.
- Portability: HSAs are portable, which means that you can keep your HSA even if you change jobs or lose your health insurance coverage.
- Investment options: Many HSA providers offer investment options, so you can grow your savings over time.
- Triple tax benefit: HSAs offer a triple tax benefit: tax savings on contributions, tax-free investment growth, and tax-free withdrawals for qualified medical expenses.
What is a flexible spending account (FSA)?
An FSA is a savings account that can be used to pay for qualified medical and dependent care expenses. FSAs are available to individuals who are employed by an employer that offers FSAs.
What are the benefits of an FSA?
There are several benefits to using an FSA, including:
- Tax savings: Contributions to an FSA are made with pre-tax dollars, which means that you lower your taxable income.
- Use it or lose it: FSAs are use-it-or-lose-it accounts, which means that you must spend the money in your FSA by the end of the plan year. However, some employers offer a grace period or carryover provision.
- Variety of eligible expenses: FSAs can be used to pay for a wide variety of qualified medical and dependent care expenses, such as deductibles, copays, coinsurance, prescription drugs, dental care, vision care, and dependent care.
Which account is right for you?
Whether an HSA or an FSA is right for you depends on your individual circumstances. Here are a few things to consider:
- Health insurance plan: To be eligible for an HSA, you must have an HDHP. If you have a traditional health plan, you are not eligible for an HSA.
- Medical expenses: If you have high medical expenses, an HSA may be a good option for you. HSAs allow you to save money on your medical expenses tax-free.
- Investment goals: If you are saving for retirement or other financial goals, an HSA may be a good option for you. HSAs offer investment options, so you can grow your savings over time.
- Employment status: To be eligible for an FSA, you must be employed by an employer that offers FSAs. If you are self-employed or unemployed, you are not eligible for an FSA.
Can a person use both an HSA and FSA?
Generally speaking, a person cannot have both a health savings account (HSA) and a medical flexible spending account (FSA) at the same time. This is because both accounts are used to pay for the same types of medical expenses. However, there are two exceptions to this rule:
- Limited-purpose FSA: A limited-purpose FSA is a type of FSA that can only be used to pay for dental and vision expenses. A person can have both an HSA and a limited-purpose FSA at the same time.
- Dependent care FSA: A dependent care FSA is a type of FSA that can only be used to pay for dependent care expenses, such as childcare and eldercare. A person can have both an HSA and a dependent care FSA at the same time.
It is important to note that a person cannot use the same expense to claim reimbursement from both an HSA and an FSA. This is called double-dipping and is not allowed by the IRS.
Selerix clients can offer each of these accounts to their employees. These are great ways to save money on qualified medical and dependent care expenses. However, it is important to choose the right account for your individual circumstances. Consider your health insurance plan, medical expenses, investment goals, and employment status when making your decision.
If you are still unsure which account is right for you, including whether you can have both an HSA and FSA, talk to your employer or a financial advisor.