Depending on your situation, you may have the option to choose between an HSA and an FSA, another account you can use to save for health-related expenses.
You might also be wondering if it’s worth it to go with an HDHP just to get an HSA or if you might be better off with a traditional health plan instead. Here are some comparisons to help you make the right decision.
HSA vs. FSA
While the two accounts are incredibly similar in terms of usage, they are regulated differently, depending on the type of account you have.
A Flex Spending Account or Flexible Spending Arrangement (FSA) is only available through an employer and you can only make contributions through payroll deductions. Each year during open enrollment, you’ll determine how much you want to contribute for the upcoming plan year.
Your employer will then deduct equal contributions from your paycheck the following year. For example, if you choose to contribute $1,200, that’s $100 per month in pre-tax contributions. That said, you’d have access to the full $1,200 balance at the beginning of the year.
With both an HSA and an FSA, you can pay for qualified medical expenses while lowering your taxable income.
The biggest difference between an FSA and an HSA is that once you contribute money to your FSA, you need to use that money by the end of the year, or else you forfeit it back to your employer, who can then opt to use it to offset the costs of administering benefits or split it among employee contributions.
According to the IRS, an employer that sponsors an FSA can allow its employees to roll over up to $500 of their unused FSA funds to the next plan year or allow them a grace period of up to two-and-a-half months to use their full remaining balance.
While this modification is helpful, this means that the money that you contribute to your FSA doesn’t stay yours.
In general, you can’t contribute to both an FSA and an HSA in the same year. The only exception is if you have a Limited Health Care FSA.
HDHP + HSA vs. HMO or PPO
A preferred provider organization (PPO) offers a network of health care providers that you can use for medical care but also cover you if you choose an out-of-network provider — though typically at a higher cost to you and with a separate deductible.
In contrast, a health maintenance organization (HMO) limits your network to providers that work for or contract with the HMO and typically won’t cover expenses incurred through out-of-network providers unless it’s a medical emergency. HMOs also require you to get a referral from your primary care physician if you want to get an appointment with a specialist.
However, the question isn’t whether an HSA is better than a PPO or HMO, but whether you want a health insurance plan with a high deductible or a low one. It is possible for PPO and HMO plans to also be HDHPs.
To determine whether an HDHP with an HSA is better than a health plan with a lower deductible, think about how much you typically spend on health care costs for you and your family each year. If it’s a lot and you don’t think you’ll be able to afford to pay everything out of pocket until you reach a high deductible, a lower-deductible plan may be the better choice.
But if you don’t spend a lot of money on medical expenses, or the tax savings from an HSA coupled with an HDHP is worth the additional out-of-pocket costs, that may be the better path for you.
Take some time to consider all of your options, and consider speaking with your human resources representative to get personalized advice for your situation.