FSA vs. HSA: How to Work Them to Your Advantage

FSA vs. HSA: What you need to know.

Open enrollment is coming fast. With all of the recent news surrounding health care and the insurance marketplace, one thing’s for sure: you don’t want to be left out in the cold.

So, let’s say you’ve narrowed things down to what is becoming a more and more popular route: going with a health savings account (HSA) or flexible spending account (FSA) as a part of your high-deductible health plan. They’re generally credited as being the least expensive options, especially if you don’t have any chronic conditions.

Decisions Based on Age

Millennials take the cake for the demographic using HSA and FSA accounts in conjunction with High-Deductible Health Plans the most. However, while this is now the youngest and largest age demographic that qualifies for health insurance coverage, there are still a lot of Millennials who either aren’t covered or are still on their parent’s plan.

As Baby Boomers and those born in Generation X have aged, a combination of things have happened to make them more open to flexible spending and health savings accounts in lieu of more traditional health insurance plans.

For starters, they’re healthier than generations previous at this age. Combined with median incomes rising and poverty levels falling, older people have greater access to higher quality health care, including more frequent visits to the doctor for checkups and other preventive health care measures that are statistically proven to lower mortality rates.

Because of this people are living longer and are generally healthier going into old age, requiring fewer treatments, hospitalizations and unexpected medical bills. So what do they need to know about the possibility of switching to an HSA?

Explaining the HSA

Kristi Speers, director of Managed Care for Banner Health Network spelled it out.

“A Health Savings Account works like a bank account. It’s a tax-exempt or custodial account that you can use to pay or reimburse certain medical expenses,” she said. “While there are no minimum contribution or balance requirements, the federal government does set limits on how much can be contributed each year while employers decide whether or not to allow pre-tax payroll deductions.”

Theoretically then, someone who contributes the maximum to an HSA over the course of their career ($6,750 a year for families is the 2017 max, or about $260 per pay period) could have several hundred thousand dollars for medical expenses when they retire, since HSA funds roll over every year, have tax benefits and can also be invested in the stock market.

Other HSA features include:

  • Employees/enrollees can use the account to pay for qualified medical costs or save for future health expenses.
  • Contributions are tax advantaged.
  • Earnings and distributions for qualified medical expenses are tax free.

If you’re healthy and expect to be for the foreseeable future, there may not be a need for more expensive health care coverage, allowing you to make last-minute gains in investment accounts before becoming eligible for Social Security and Medicare.

What matters most when weighing the option of switching is the state of your current health. You’ll also want to factor in any specialists you see and prescriptions you’re on if you’re trying to save money by going with a FSA or HSA in combination with a high-deductible health plan from the more traditional coverage options.

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FSA vs. HSA

Over the long run, a flexible spending account may not be as effective in this situation. However, it does still offer its nuanced benefits, including having money available immediately. So, you don’t have to wait (and hope) you’ll have enough to cover any unforeseen expenses when you’re just starting out. Unfortunately, these funds do not roll over every year and often can only be used for specific medical expenses.

Some of the biggest eligible expenses you might not know of are:

  • Daycare expenses
  • Dental care (not including teeth whitening or cosmetic improvements in general)
  • Glasses and eye care
  • Orthodontics
  • Pharmaceuticals
  • Primary care visits

Now where do you go from here? Either option can save you a lot over time if you have a healthy family and are not predisposed to major medical issues as you age. And if you’re older and have been on top of staying healthy for some time, talk to your doctor and HR advisor about the possible benefits of an FSA or HSA for you and your family.

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