“Yeah I have an HSA, but I have to use that money every year.” “My employer owns the money in my HSA.” These are two common phrases (and misconceptions) we hear a lot.
HSA and FSA
Often, consumers are quite confused about the Health Savings Account (HSA) and the Flexible Spending Account (FSA). We wanted to shed some light about the pros and cons of each and how they compare to each other.
Health Savings Accounts
The Health Savings Account is a savings account that is coupled with a qualifying-High Deductible Health Plan (HDHP). These HSAs are typically provided to you by your employer, but the moment that account is set-up, the account is yours (not your employer’s). A qualifying-HDHP is when the first $1,300 (individuals) / $2,600 (families) is paid out-of-pocket by you before insurance kicks in (so no copays or coinsurance before the deductible has been met).
Pros of Health Savings Accounts (HSAs)
- Contributions are pre-tax. Whether you make it via payroll or do it outside of your employer, contributions are pre-tax. 2017 limits are $3,400 for individuals and $6,750 for families.
- Your balance rolls over from year-to-year. There is no concept of “use it” or “lose it.”
- You can earn interest and investment your money. Any gains are tax free so long as they are kept in your HSA.
- They are portable. Since each account is owned by the individual (and not the employer), you have the freedom to take your HSA dollars with you. So for example, if you were to leave your employer, you can take those funds and roll them into an individual account (Lively can help with this)! Additionally, if your HSA is provided to you by your employer, there is no obligation that you need to stay with that provider. You have the freedom to choose your provider. However, if your employer does make contributions into your account, you may lose that benefit – we recommend keeping your account with your employer and opening a separate account and do a rollover once/year to get the most out of your HSA!
- You can take your money out at any time in the future – be it tomorrow or 30 years from now – tax and penalty free so long as you use it for qualified medical expenses.
- Anyone can contribute into your HSA account. This includes your employer, spouse, friends, etc. The only catch is that you cannot exceed your maximum contribution limits.
- If you are 55 and older, you can make a catch-up contribution of an extra $1,000 per year.
- Once you become 65 years old, you can make distributions on your HSA and there is no penalty. It operates just like a 401k – you only pay ordinary income taxes at that point.
- If contributions are made by your employer, they will save 7.65% (FICA taxes on payroll).
- If you don’t have enough money in your account to pay for something, you can pay out-of-pocket for those expenses and “reimburse” yourself from your HSA account when you fund it later. Just hold onto your receipts!
Cons of Health Savings Accounts (HSAs)
- They can only be used in conjunction with a qualifying-High Deductible Health Plan. If your deductible levels do not meet the minimum levels described above or have copays or coinsurance prior to hitting the deductible, you are unable to open an HSA.
- They are tremendous tax-advantages of opening an HSA, however if you don’t pay taxes or are in a very low tax bracket, the magnitude of the benefits will not be as great.
- Individuals typically get charged fees for just having an account open, but not with Lively. Individuals can open an HSA account with Lively for free…and we don’t even have one of those “fee schedules.”
- If you withdraw your money for non-qualified medical expenses before 65 years old, you have to pay a 20% penalty + income taxes.
- If you ever get audited by the IRS, you must prove that any distribution was for a qualified medical expense and that you were on a HDHP when you made contributions into your HSA. Lively allows you to store and categorize your receipts to help in case you ever get audited.
Flexible Spending Accounts (FSAs)
Flexible spending accounts are different. Here is a breakdown of the pros and cons of an FSA:
Pros of Flexible Spending Accounts (FSAs)
- An FSA can be used on any health plan (not just HDHPs).
- Contributions are pre-tax.
- Since contributions are made via payroll, your employer will save 7.65% (FICA) on payroll taxes.
- You can pay for qualified medical expenses throughout the year with these funds.
- Your full balance is available on day 1 – you don’t need the fund in your account to make a purchase. This is a risk for the employer as they need to pay for the difference until you make it up throughout the year.
Cons of Flexible Spending Accounts (FSAs)
- Contributions are limited to $2,600 for 2017. The employer can also choose to offer a lower amount if they want.
- The money in an FSA is “owned” by the employer. If you were to ever leave your employer in the middle of the plan year, this money does not go with you.
- If you have a balance at the end of the year, only a fraction can rollover for a limited time (usually $500 for up to 6 months). For all intents & purposes, it is “use it” or “lose it”. Unused funds thereafter are forfeited.
- You typically can only sign-up for an FSA during your employer’s open enrollment period.
- If you are a freelancer or contractor, you won’t be able to get an FSA as it has to come from your employer.
If you have the option to pick a Health Savings Account vs a Flexible Spending Account, you should consider the points above to make the best decision that fits your employees and unique circumstances. Please note that the FSAs mentioned above are unique to non-dependent care FSAs. We will discuss those in a separate blog post.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.