Client Question: Flex Spending & Health Savings

November 8, 2023

With open enrollment season approaching, I was talking with a client about health care coverage and the accounts that are offered to help fund health care costs. Under her health insurance plan, she has the option to use a Flex Spending Account and under her husband’s plan, he can use a Health Savings Account. We talked thru the differences between the two type of accounts and I thought it was worth sharing here as well

Flex Spending Accounts

Flex Spending Accounts (FSAs) were first created in the 1970s and pre-date the major changes to health care insurance under the Affordable Care Act (ACA). These accounts are offered by employers to their employees as an employee benefit and offer a way to save and use pre-tax dollars for health care costs.

Employees can defer a portion of their earnings into their FSA each pay period and then use the funds on eligible out of pocket health care costs, thereby allowing pre-tax dollars to pay for these health care costs.

There is an annual limit ($3,050 per employee in 2023) and the balance generally must be used within the plan year (“use it or lose it”).

FSA accounts cannot be invested (stay in cash until paid out for health care costs) and are only available as an employee benefit (ie: not available if you are self-employed or applying for health insurance as an individual). Further, FSAs are owned by your employer (even though it’s your money) – so if you leave a job, you will forfeit those funds

Health Savings Account

With the roll-out of the ACA, another account type (and another acronym!) for health care cost savings was announced – the Health Savings Account (or HSA). We have written about these accounts in the past (you can revisit the details of these accounts here) but we’ll highlight the main differences between FSA and HSAs below

HSAs are Portable, Investable, & Under your Ownership

In contrast to an FSA, HSA are accounts in your name that will follow you for life. Any funds put into an HSA can be rolled over from year to year. Given that, you also have the option to invest the funds in a variety of investment options to allow the funds to grow over time (or be used as a longer-term reitrement/savings account)).

Dependent on Insurance vs Employer

Whereas FSA eligibility is dependent on your employer choosing to offer the benefit, HSA eligibility is dependent on your health plan. To be eligible for an HSA, you must be enrolled in an HSA-eligible high-deductible health plan and not have other disqualifying health coverage. This eligibility therefore applies to both employees as well as those seeking and paying for their health insurance as an individual

Higher Contribution Amount for an HSA

HSAs usually allow you to contribute more than an FSA does. For 2023, the IRS contribution limits for health savings accounts (HSAs) are $3,850 for individual coverage and $7,750 for family coverage. And if you’re 55 or older during the tax year, you may be able to make a catch-up contribution, up to $1,000 per year.

As you can see, there are some key differences between FSAs and HSAs. If you’re eligible for both an HSA and FSA, be sure to carefully weigh each option, considering the pros and cons of each. The one that’s best for you will depend on your family, health history, and personal goals and preferences.

And if you don’t have a choice between FSAs and HSAs due to your health plan or company’s offerings, don’t worry! Both account types are great options for saving money to pay for qualified medical expenses.

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