Since Health Savings Accounts (HSA’s) were approved by Congress in 2003—part of the largest expansion of government intervention in medicine in 40 years—and became law in January 2004, there has been great debate about when to make the choice to use a health savings account versus a flexible spending account. While these accounts can be tricky, here are some smart money moves to learn about the differences so you can make the best choices for your family.
- You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSA’s. A HDHP generally costs less than what traditional health care coverage costs (like a PPO/HMO), so the money that you save on insurance can be put into the Health Savings Account. Flexible Spending Accounts can be funded whether or not you are part of a high deductible health insurance plan.
- You own and you control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow (generally when your balance exceeds $2,000). Most importantly, the expenses that you pay for on a tax-free basis can be medical, dental, and vision. FSA accounts cannot be invested by you but they also can be used tax free for items such as medical expenses.
- HSA accounts are not use or lose. They will rollover from year to year whether or not you use the money in that particular tax year. FSA plans used to be 100% use or lose, but there were some minor modifications made to allow you to rollover a small portion of the funds to the following tax year.
- FSA’s come in different types of flavors from a Health Care FSA to a Dependent Care FSA. It’s important to make sure you think about what expenses you will want to spend pre-tax with these types of accounts, whether it is for parking expenses, medical expenses, or dependent care expenses.
- HSA’s will allow you to put away more money in general than an FSA account. For 2016, the amount an individual can put away is $3,350 and for a family it is $6,750. If you turn 55 or are older than 55 this year you can put away an additional $1,000 as a catch up provision. FSA limits are set for $2,550 per employee for 2016.
These choices can never be easy and mean a lot more to your family today with the ever-changing landscape of health insurance and medical costs. Use these tips to help you sort through the confusing differences between HSA and FSA accounts.
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