It’s open enrollment! This is the time of the year that you can shop or change your health insurance, enroll in supplemental insurance and even open savings account dedicated to your medical expenses.
Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are both tax-advantaged accounts that can be used to pay for qualified healthcare expenses. However, there are some key differences between the two types of accounts:
- Eligibility: FSAs are offered by employers as part of a benefit package, while HSAs are available to anyone who is enrolled in a high-deductible health plan (HDHP).
- Contributions: With an FSA, contributions are made by the employee through payroll deductions, and the contribution limit is set by the employer. With an HSA, contributions can be made by the employee, the employer, or both, and the contribution limits are set by the IRS.
- Use of funds: FSAs have a “use it or lose it” rule, which means that any unused funds in the account will be forfeited at the end of the year. HSAs do not have this rule, and funds can be carried over from year to year.
- Investment options: HSAs often offer investment options, such as mutual funds, whereas FSAs do not.
- Tax benefits: Both FSAs and HSAs offer tax benefits, but they are structured differently. Contributions to an FSA are made on a pretax basis, which means that they are not subject to federal income tax or payroll taxes. Withdrawals from an FSA are also tax-free as long as they are used for qualified healthcare expenses. Contributions to an HSA are also made on a pretax basis, and withdrawals are tax-free as long as they are used for qualified healthcare expenses. However, HSAs have an additional tax benefit: any unused funds in the account that are invested and allowed to grow can be withdrawn tax-free in retirement.
Both FSAs and HSAs can be useful tools for helping to pay for out-of-pocket healthcare expenses, but it’s important to understand the differences between the two and to choose the one that is best suited to your needs.
