When the fall open enrollment begins, it’s time to think about different insurance options that will best suit your budget and needs. You might choose to enroll in a health savings account (HSA) or a flexible spending account (FSA). Both accounts provide tax savings on medical costs, but there are some key variables you should know that make all the difference. This includes if you are eligible, and when your savings expire. After reviewing these, you’ll be sure to make the best choice!
Health Savings Account
HSAs are only available to people with high-deductible health plans(HDHPs). For 2019, an HDHP, which often carries lower premiums, is defined as having a deductible of $1,350 or more for singles and $2,700 or more for families. The maximum out-of-pocket cost is $6,750 for individuals and $13,500 for families.
As you make contributions to the account, you can rest assured that when you withdraw them later, they’ll help save you money. This comes from being tax-advantaged. If this feels confusing, think of it this way. When you have a qualified medical expense (like health plan copayments), you can withdraw money from your HSA, and that expenditure is tax-free! However, take note that unqualified expenses incur a 20% penalty.
For 2019, the maximum annual contribution allowed in an HSA is $3,500 for an individual and $7,000 for a family. Employees aged 55 or older can make $1,000 annual catch-up contributions.
If you are considering an HSA with a private insurance plan, you can deduct the year’s contributions from your taxes when you file. One notable difference between HSA and FSA is that HSA savings are allowed to grow without expiring at the end of the year. Also, you can take the HSA with you when you switch jobs.
Flexible Spending Account
An FSA always comes paired with employer health insurance. This account is similar to an HSA, but there are some differences.
As stated, self-employed individuals cannot get an FSA. You must be employed by a company that offers the plan. The expenses qualified for FSAs are the same as the HSAs.
The major difference is that you must use your FSA money. If you do not spend the money you saved by the end of the year, then you can lose it. If your employer selected a rollover option, then it can be saved for the next year. Make doubly sure that you’ve asked your employer for that one.
The money for FSA comes from your paycheck before taxes. So even if you haven’t necessarily paid for it yet, you can spend the full contribution amount at the beginning of the year if needed. However, if you leave your company in the middle of the year, you’ll likely have to pay back spent funds that haven’t been covered by your paycheck deductions yet. The maximum amount an employee can save in an FSA in 2019 is $2,700.
Unlike the HSA you cannot take the FSA account with you when changing jobs.
The Differences
You cannot have both an HSA and an FSA. When choosing which is best for you, consider these differences:
- Qualifications– HSAs are only available to those who are employed and have a high-deductible health care plan. Self-employed people can get an HSA plan. FSAs are only available to people who are employed and it is offered by the employer. Self-employed cannot get it.
- Money Expiration- HSA funds roll over to the next year, and can grow tax-free for years. You can take it with you when you switch jobs. An FSA is a “use it or lose it” kind of plan. You must use up the money saved up by the end of the year, or you can lose it. It does not roll over unless your employer has chosen that option. You will lose it when you switch jobs.
- Annual Contribution Limits- For 2019, the maximum annual contribution allowed in an HSA is $3,500 for an individual and $7,000 for a family. The maximum amount an employee can save in a health FSA for 2019 is $2,700.
When it comes to choosing between the two plans, you must consider what is the best option for you. Both accounts have their own set of benefits, but younger and healthier people generally opt for the HSA. FSAs have less flexibility, but they will help you save money, as long as you use it by the end of the year.
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