Health or Flexible: What Kind of Savings Account is Right for You?

While similar in many ways, a Health Savings Account and a Flexible Spending Account have specific differences that make them better suited for different scenarios. It’s important for you to understand the unique features of each option that may make the difference between choosing one over the other. In this blog we will cover qualifications, contribution limits, ownership, long-term growth and the tax benefits of each. We will also discuss how the money in these accounts can be spent.

Flexible Spending Account

Along with health insurance, many employers now offer the option of a Flexible Spending Account (FSA, also known as a “flexible spending arrangement”). A FSA is similar to a savings account provided by the company that enables employees to set money away to pay for certain eligible medical costs. FSA are funded through monthly payroll deductions on a pre-tax basis and operate on an annual plan year basis.

Your funds are immediately made available the day you join a FSA, which is a huge benefit. On January 1, you will decide how much you will want to contribute to your account and how much your pretax monthly installments will be. This means that even if your FSA account does not have enough money to pay your $1,500 eligible medical charge, your FSA administrator will nonetheless pay the full amount of your claim.

Employers may make contributions to your FSA even though they are not required to. The IRS limits the amount of money allowed in a FSA and it typically changes each year. For 2023, an individual is allowed up to $3,050. Rates are different for married individuals filing separately or together. Your FSA administrator will be able to help determine the correct limit for specific accounts.

• FSA Ownership

Since the FSA is employer-sponsored, the account is owned by the company. This means that if you decide to leave your current employer, any money that you haven’t spent from that account, stays with the company. Likewise, some FSAs require you to use all funds in the account by the end of the calendar year or you forfeit those as well. Many employers offer a rollover option in which a given amount determined by the IRS ($610 for 2023), is allowed to carry over into the next year.

Employers may also offer a grace period of 2 ½ months for you to use any remaining funds from the previous year. Most employers will offer either the rollover or the grace period but not both.

• FSA Taxes

One of the main advantages for employees is that contributing to an FSA enables you to lower the amount of taxes you might otherwise owe. Your FSA contributions are not counted toward your taxable income, which could result in sizable annual income tax savings. An FSA also reduces the amount of payroll taxes you’re required to pay. Payroll taxes, including Medicare and Social Security taxes, are deducted from your earnings up to a specific amount.

The key benefit of an FSA is that it withholds a portion of your taxable income, which is deposited tax-free into an account you can use to cover thousands of qualified medical expenses.

Health Savings Account

A Health Savings Account (HSA) is a specially designated pretax account that you can contribute to in order to pay for qualifying medical expenses. To qualify for a HSA you need to meet certain criteria.

• Be enrolled in a HSA eligible health plan
• No one can claim you as a dependent on their tax return
• You are covered under a high-deductible health plan (HDHP)
• You are not enrolled in Medicare

If you are interested in starting a HSA, you will want to check with your current health insurance provider to see if they support HSA and if your deductible meets the requirements. Any health insurance program with a sizable deductible qualifies as an HDHP. A family plan’s minimum deductible for 2023 is $3,000 while that for an individual HDHP is $1,500.

• HSA Ownership

You can create an HSA alone or in cooperation with your employer. Like FSA, the IRS has contribution caps in place that limit how much you and your employer can contribute to your HAS. For 2023, contributions for a self-only plan can total up to $3,850 and $7,750 for family HDHP coverage.

Unlike FSA accounts that are created and owned by your employer, a HSA is yours and the money is transferrable. If you leave your company, you can take your HSA savings with you. Another advantage is that with a HSA there is no time limit on when you can spend your money or a cap on how much you can roll over. You won’t lose your funds if you don’t spend them before the end of the plan year. Each year, you have the option of rolling over any unused HSA money without any limitations or restrictions.

• HSA Tax Benefits

Similar to the FSA, a HSA offers several tax benefits.  The contributions you make to an employer-sponsored HSA account are exempt from payroll or income taxes. On the other hand, if you created your HSA account on your own, you can claim a tax deduction for your HSA contributions. Whether or not you choose to itemize your deductions, you are still eligible for the tax deduction.

Making a Purchase

It used to be that to make a purchase using the money in your FSA you would have to pay for the item out-of-pocket and then submit your paperwork with your FSA administrator and wait for approval and reimbursement. Nowadays, the process is easier for both accounts.

With the ease and convenience of digital apps and banking cards, using these funds has become more straightforward. Typically, when you establish either type of account, you are given a card that works like a debit card except the money comes straight out of your FSA/HSA. Accounts have online portals and/or apps that allow you to check your balance and transfer money.  Knowing what you can spend your money on is where things can get a little trickier.

Both HSA and FSA accounts allow to you pay for certain medical and dental expenses including medical equipment, prescription medications, over-the-counter medications, insulin, and many other products, procedures and preventative exams and screenings. Both accounts will let you use the money to pay for deductibles, copayments, and coinsurance but typically not premiums. The IRS has provided Publication 502 with a description of what is considered a medical expense and what is and is not included.

When shopping online, retailers should have items identified as HSA/FSA approved to save you time. All-Star Medical strives to order medical equipment that is pre-approved and lists that information on the products page. While we do not bill insurance, medical equipment purchased through All-Star Medical can be paid for from you HAS/FSA and may count toward your deductible if the equipment is covered by your plan. We recommend reading our blog on deductibles and then reaching out to your insurance provider to see what is covered under your plan so that you are able to make the best use of your money.