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Nov 28, 2018

Open Enrollment Options - HSA versus FSA

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Now that we’re getting into the swing of the holiday season make sure you also pay attention to that other important time of the year - open enrollment. While you are weighing things like deductibles and out-of-pocket limits, be sure to investigate any offered savings plans, too. It’s likely that you will have a choice between a health savings account (HSA) and a flexible spending account (FSA) and, although similar, there may be a better option for you from a financial standpoint. In the HSA vs. FSA matchup, which one is right for you? Let’s take a look.
What Exactly Are HSA and FSA Accounts? At their basic level, both HSAs and FSAs are bank accounts that hold money to be used specifically for medical expenses. They both offer tax advantages for the account holder, but they do have some key differences. As with any decision involving your hard-earned money, it’s important to understand the differences before choosing. You want to be sure that your money works efficiently for you, without any surprises.
As we go through an explanation of the two types of accounts, pay attention to details like eligibility and ownership. These are key pieces of information that will help you decide which, if any, to choose.

Flexible Spending Accounts Explained
  • Who owns it? An employer establishes a flexible spending account. An individual cannot open an FSA on their own, outside of an employer’s benefits plan. If you leave your employer, you cannot take the FSA with you.
  • Who funds it? Pre-tax payroll deductions are the typical funding sources, but some employers also choose to contribute to these accounts.
  • What is the maximum contribution? Employers used to be able to set their own limits, but the Affordable Care Act changed that policy. For 2019, contributions are capped at $2,700. There is a projected increase for 2020 to $2,750. You must choose your contribution amount during open enrollment and cannot alter it during the year unless you have a qualifying life change like getting married or having a baby.
  • Is there a health insurance requirement? In short, no. You may use an FSA in conjunction with another health care policy like a traditional 80/20 plan, but it is not a requirement.
  • How can the funds be used? Money in your flexible spending account must be used for qualifying medical expenses. Some examples of qualifying expenses are:
    • Co-pays
    • Deductibles
    • Prescriptions
    • Over-the-counter medications, if prescribed by a doctor
    • Crutches
    • Bandages
    • Blood sugar testing kits
  • Do the funds roll over into a new year? Typically, FSA funds fall under the “use it or lose it” category. If you do not use the full amount by the end of the year, you forfeit the money back to your employer. However, under the Affordable Care Act, employers now have the option of offering employees either a grace period of 2.5 months to use the funds or the ability to roll over up to $500. Check with your human resources manager to see what your employer offers.
  • What are the tax benefits? FSA contributions come from pre-tax dollars, and distributions are not taxed. That can add up to some significant tax savings!
Health Savings Accounts Explained
  • Who owns it? An employer or an individual can establish a health savings account. When you choose to set up an HSA, you own the account, and it follows you even if you leave your employer. This can be a real benefit if you’re thinking about changing jobs.
  • Who funds it? Health savings accounts can receive contributions from pre-tax payroll deductions, employer contributions, and individual deposits.
  • What is the maximum contribution? For an individual, the 2019 cap is $3,500. For a family, the current cap is $7,000. Projected changes for 2020 will raise the individual maximum to $3,550 and the family maximum to $7,100. You can make or change contributions at any time which can be helpful when unplanned life events happen.
  • Is there a health insurance requirement? Yes, there is. This distinction is one of the most significant differences between an FSA and an HSA. You cannot start and contribute to a health savings account unless you also enroll in a high deductible health plan (HDHP). This means your health care policy must have a deductible of at least $1,350 for an individual and $2,700 for a family. While you must have an HDHP to open an HSA and make contributions, you can withdraw the funds for qualified medical purchases at any time, even if you no longer have the high deductible plan. If you have the option to enroll in either an HDHP or traditional plan, compare the two closely. Although there are many financial benefits to an HSA, the HDHP could actually make it a more expensive option depending on your anticipated health care needs for the following year.
  • How can the funds be used? To be withdrawn tax-free, HSA funds must be used for qualifying medical expenses just as is the case for an FSA.
  • Do the funds roll over into a new year? Another clear distinction between FSAs and HSAs is the rollover. There is no requirement to use health savings account funds by the end of the year. All money in the account remains available for use by the account holder.
  • What are the tax benefits? Contributions to a health savings account are tax-deductible and can come from pre-tax payroll dollars. Growth in the account and withdrawals for qualified medical expenses are not taxed. However, withdrawals made for non-medical purposes before age 65 are taxed and incur a 20% penalty. After age 65, non-medical distributions are taxed but do not bring a penalty.
HSA vs. FSA: Which One Wins? It’s clear that both of these accounts offer great perks to the account holder. For long-term flexibility, a health savings account is the winner. Since it follows you and not your employer, you own the funds regardless of where you work. Individuals who anticipate a job change within the year may want to opt for an HSA.
For those who do not want a high deductible medical plan, a flexible spending account may be the right choice. Just be sure to pay attention to the amount sitting in the account and use it up before the deadline. Planning with this account is particularly helpful so you don’t lose hard-earned funds.
Taking time to review your health care options and the financial impact they make on your life is quite an important aspect of managing your money to the fullest. And remember, there’s no rule stating you must have an FSA or HSA, either. As you go through the open enrollment process, discuss your needs with your insurance broker or HR representative to determine what is best for you and your finances.

Updated November 2019

Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.

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