According to the Peter G. Peterson Foundation, Americans spent over $4.3 trillion on medical care in 2021, which averages out to about $12,900 per person. That’s one of the highest per-person healthcare costs in the world. A single unexpected bill could amount to thousands of dollars, and that’s why many prefer to save up for healthcare costs in advance.
Two of the most popular ways to do this are using health savings accounts (HSAs) or flexible spending accounts (FSAs). The two accounts have similar names, but they have some key differences that affect who can have them and how useful they are. Here are five you need to know about.
1. Eligibility requirements
FSAs are only available to employees of companies that offer these accounts as a benefit to their workers. If your employer doesn’t have an FSA, you won’t be able to contribute to one.
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HSAs are available to anyone who meets the following criteria:
- They have a high-deductible health insurance plan (one with a deductible of at least $1,500 for an individual or at least $3,000 for a family in 2023)
- They aren’t claimed as a dependent on someone else’s tax return
- They aren’t eligible for Medicare
Check your health insurance plan if you’re unsure what its deductible is, in order to find out whether you qualify for an HSA.
2. Account ownership
FSAs are technically owned by your employer, and you can lose access to this account if you quit your job or are fired. This is one reason why many people don’t like to stash too much money here, especially if they don’t plan to remain with their employer for very long.
You own your HSA, though, and you can continue contributing to yours as long as you have a qualifying health insurance plan. You can use the funds whenever you want, even if you’re no longer able to make contributions. In addition, you can choose which bank or company you want to open your HSA with. The best HSA providers enable you to invest your funds so your money can grow more quickly over time.
3. Annual contribution limits
Contribution limits for FSAs and HSAs vary over time. In 2023, you may contribute up to $3,050 to an FSA. HSA contribution limits depend on the type of health insurance plan you have. Those with an individual health insurance plan may contribute up to $3,850 in 2023, while those with a family plan may contribute up to $7,750. And adults aged 55 and older can add an extra $1,000 to these limits.
In both cases, your contributions are made with pre-tax dollars. This means that they reduce your taxable income for the year. This could save you money on your taxes compared to keeping your medical savings in a savings account. In addition, if you use the money for medical expenses, you won’t pay taxes on it at all.
4. Rollovers
HSAs are the better choice for long-term savings because you can roll unused funds over from one year to the next without issue. Some people even use these accounts as an alternative to a traditional retirement account because they can leave their savings there and enjoy the tax benefits the account provides for as long as they want.
FSA funds often expire at the end of the year, but this varies by plan. Some employers may permit employees to roll over up to $500 to the next year or give you an extra 2.5 months to use up any remaining funds. But they aren’t legally required to provide these options.
5. Overall flexibility
HSAs are significantly more flexible for most people, which is why they’re more popular. In addition to allowing rollovers, these accounts also permit you to make non-medical withdrawals. However, you will pay taxes on these, plus a 20% penalty if you’re under 65.
But ultimately, it’s up to you to decide which account makes the most sense to you. And you can even use both if you meet the qualification requirements for them. Just remember to be mindful of the rules for each, so you don’t run into any surprises.
