Health Savings Accounts and Flexible Savings Accounts

The modern health insurance marketplace offers consumers a long list of options when it comes to selecting the plans that are most appropriate for their needs.

Potential enrollees can choose plans based on network size, flexibility, their preference for the role primary care providers play in the system and many other factors. However, one aspect of health care plans is universal. One way or another, consumers must pay for their plans and the care they receive.

Consumers may be held accountable for health care expenses in the form of deductibles, premiums, copays or out-of-pocket expenses. These costs can take a sizeable bite out of a household’s income, especially in situations where severe injuries, chronic illnesses or the use of multiple, long-term prescription medications use is involved.

Health savings accounts (HSA) and flexible savings accounts (FSA) create opportunities for consumers to pay for those and other health care-related expenses using pre-tax income. In some cases, consumers’ employers will even match these saved funds, doubling the resources families’ have to pay for their medical needs. Although they function similarly, health savings accounts and flexible savings accounts are distinct from one another in essential ways. Understanding those differences is a critically important first step to identifying and choosing which one is the better option for specific consumers’ needs.

Health Savings Accounts

Not all consumers will qualify to open health savings accounts. HSAs are only available to individuals or families enrolled in health insurance plans with high deductibles. In 2018, individual health insurance enrollees needed deductibles more than $1,350 to qualify, while the minimum qualifying deductible for a family policy was $2,700.

But having a high deductible plan does not automatically qualify policyholders for HSAs. Consumers must check with insurers before signing up to verify whether a particular high-deductible plan will legally qualify them for an HSA. Deductibles are not the only qualifying factor consumers must take into account. Health insurance enrollees are also generally disqualified from opening an HSA if they:

  • Are enrolled in more than one health insurance policy.
  • Are eligible for Medicare.
  • Have been claimed as a dependent on another person’s taxes.

Consumers who do qualify to open health savings accounts face limits on the amount of money they can donate to and pull out of their accounts per year. In 2018, individual enrollees were permitted to contribute up to $3,450 to their HSAs. They were allowed to pull a maximum of $6,550 from their accounts for out-of-pocket health insurance and care costs and other medical expenses. For family policies, the 2018 contribution cap was $6,900 and policyholders were allowed to withdraw up to $13,100.

Consumers can set up recurring pre-tax deductions from their paychecks or other sources of income to be funneled directly into their HSA accounts. They can also change those deductions at any time. Any funds that HSA account holders do not use by the end of the fiscal year can generally be “rolled forward” for us the following year.

Depending on how enrollees structure their accounts, HSAs may qualify to earn interest. HSA funds may also be used to invest in the stock market, earning returns on investment. These options can significantly increase HSAs’ values and increase consumers’ health care buying power.

Flexible Savings Accounts

Flexible savings accounts are not regulated by the same special eligibility criteria as HSAs, but they are subject to other restrictions. Anyone can open and contribute to an FSA. All enrollees are subject to the same annual contribution cap whether they have an individual policy or a family insurance policy. In 2018, the cap was set at $2,650.

In addition to lower contribution caps, FSA enrollees face stricter limits on how their contributions can be managed. Like HSA holders, consumers with FSAs can establish regular and automatic deductions from their incomes to be added to their accounts. These amounts can only be set or altered when the account is established, during special enrollment periods or in a set period of time after a qualifying change to the enrollee’s family status. Qualifying changes might include the consumer getting married or divorced or the birth or adoption of a child.

Any money remaining an FSA at the end of the fiscal year must be spent on qualifying costs or it will be forfeited. Except in rare cases, balances do not roll over for use the following year. FSAs cannot be invested or earn interest.

Layering Accounts

In most cases, individuals and families who qualify to open a health savings account are not permitted to also open an FSA. Occasionally, exceptions are made for FSAs dedicated solely to either dental care or vision care. Consumers who have the legal ability to open both HSA and FSA accounts have a unique opportunity to extend their tax-advantaged savings.

Important Considerations

Health savings accounts and flexible spending accounts both provide consumers with valuable opportunities to save money, tax-free, that they can put toward medical and health insurance expenses. Both types of plans work in much the same way. Enrollees are issued debit cards linked to their accounts. Throughout the year, consumers can use those debit cards to purchase or pay for qualifying expenses. Qualifying expenses may vary by account or plan, but typically include:

  • Health insurance deductible costs.
  • Health insurance plan copays.
  • Prescription medication costs.
  • Out-of-pocket medical expenses, such as the cost of seeing an out-of-network specialist not covered by a policyholder’s health plan.

Despite these similarities, HSAs and FSAs have important differences. In almost all cases, the additional benefits of health savings accounts make them the preferable option for all consumers who qualify to open one. The following are examples:

  • HSA annual contribution limits are higher than FSA contribution caps, maximizing consumer’s ability to capitalize on tax-free income for health care costs.
  • HSAs can be rolled over from year-to-year, providing larger buffers for serious and unexpected medical expenses.
  • Flexible spending accounts are often tied to a specific employer. Enrollees who leave one employer for another generally lose their accounts and accrued balances. HSAs, by contrast, can be carried over from one employer to another.

Health insurance professionals uniformly recommend that consumers take the time to work with their companies’ human resources departments, their financial advisors or other available experts to ensure that they understand their HSA and FSA options and maximize their use of these opportunities.

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