Both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are popular tax-advantaged accounts used to pay for medical expenses, but they come with distinct rules and benefits. The truth is most of the time you might not get a choice. It really depends on your company and the medical plans provided.
Flexible Spending Accounts (FSA)
Pros
Pre-Tax Benefits
Contributions are made pre-tax, reducing your taxable income.
Immediate Availability
The full annual amount is available at the beginning of the year, providing immediate access to funds for medical expenses.
Employer Contributions
Employers can contribute to your FSA, potentially increasing the total funds available.
No High-Deductible Health Plan Required
You can open and contribute to an FSA with any type of health insurance plan.
Cons
Use-It-or-Lose-It Rule
Any unused funds at the end of the plan year can be forfeited, though some plans allow a carryover of up to $640 ( in 2024) or a grace period to use the funds early in the following year.
Limited Carryover
The ability to carry over unused funds is limited and not all plans offer this feature.
Job Change Limitations
FSAs are generally not portable when you change jobs; you lose access to the funds unless you qualify to continue benefits under COBRA.
Lower Contribution Limits
The contribution limit for FSAs is lower than for HSAs, with a maximum of $3,200 per year in 2024.
Health Savings Accounts (HSA)
Pros
Triple Tax Advantages
Contributions are made pre-tax, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
Portability
HSAs are tied to the individual, not the employer, so you can keep your HSA if you change jobs or retire.
Roll-Over Feature
Unused funds roll over year to year, with no risk of forfeiture, allowing you to potentially build a substantial medical emergency fund.
Investment Options
Many HSA plans allow you to invest your contributions, which can grow over time similar to a retirement account.
High Contribution Limits
The contribution limits are higher than FSAs; $4,150 for individuals and $8,300 for families in 2024, with an additional $1,000 catch-up contribution allowed for those 55 and older.
Cons
High-Deductible Health Plan Requirement
To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP), which may not be suitable for everyone, especially those with high medical expenses.
Out-of-Pocket Expenses
High deductibles mean you might have to pay a significant amount out-of-pocket before your insurance covers your medical costs.
Complexity and Responsibility
Managing an HSA requires more active involvement than an FSA, including tracking contributions and withdrawals, and understanding what qualifies as a medical expense.
Conclusion
If you have a choice, I would almost always choose an HSA. It is the only triple-tax leveraged account, which means it won’t get taxed going in, growing, or when you use it. HSAs offer greater flexibility and long-term growth potential. While HSAs are great, if you need immediate access to funds or a lower-deductible health plan, then FSA would be the right choice. Deciding between the two often depends on your current health situation, taxes, and long-term financial plan.
