It’s near open enrollment and you are faced with one of two choices Health Savings Account (HSA) vs Flexible Spending Account (FSA). We have highlighted and lowlighted both types of health savings account in our previous posts located here (HSA) and here (FSA). So which one is better?
Before we begin, because health insurance is a complex topic to understand, here are some terms you have to understand:
Premium: what you have to pay each month
Out of pocket costs: Any additional costs you have to pay in addition to your premium
Deductible: a type of out of pocket cost that you must pay before your insurance starts paying
Coinsurance: a type of out of pocket cost that you must pay after your deductible (usually a percentage)
Co-pay: a type of out of pocket cost that you must pay when you visit your doctor
Coverage: What your insurance covers. This can speak to the type of procedures and/or how much you pay for your insurance.
High Deductible Health Plan (HDHP): A health plan type that is typically paired with a Health Savings Account (HSA). These plans have a high deductible as defined by the Internal Revenue Service which is over $1,350 in 2019 ($1,400 in 2020).
Health Spending Account: These are special accounts that are set up by an employer or an individual. You are allowed to contribute a certain amount of money each year which is only allowed to be spent on qualified medical expenses.
Health Flexible Spending Account (FSA): These are special accounts that are set up by an employer only. You are allowed to contribute a certain amount of money each year which is only allowed to be spent on qualified medical expenses. For more information check out our previous post on FSAs.
Ground Rules for HSA vs FSA
Let me be real with you: There is no single one good account for every person. Boom. Mind blown right? A lot of financial advisors attempt to peddle a one size fits all strategies and they don’t always work. Health Savings Accounts (HSA) might be a great idea for one group, but a terrible idea for another group. Similarly, a Health Flexible Spending Accounts (FSA) may be great for one group but not for another. We’ll try to do our best to delineate what is best for your situation. However, make sure to check with a health insurance expert before making any decision.
You are eligible for an HSA only if you enroll into an HDHP which makes up a small proportion of health insurances offered. Dependent on your employer, you may need to set up your own HSA account or use the one from your employer. You are eligible for an FSA if you are enrolled in a non-HDHP which makes up a large proportion of insurances offered. However, your employer must participate for you to be eligible for an FSA.
Because we believe the mantra that health insurance is designed to prevent you from financial catastrophe, FSAs are more attractive. FSAs can be paired with non-HDHP plans which typically have lower deductibles and lower out-of-pocket costs.
HSA: 0 – FSA: 1
An HSA allows you to contribute up to $3,500 in 2019 ($3,550 in 2020) in pre-tax dollars while FSAs allow you to contribute up to $2,700 in 2019 ($2,750 in 2020) in pre-tax dollars. However, unlike FSAs, HSAs allows you to put post-tax dollars into an HSA. That means you can choose to contribute to your HSA before your paycheck or after your paycheck. FSAs are run by employers only, ironically this feature decreases its flexibility. For FSAs, you must specify how much money you want to set aside at the beginning of each year. From there, your paycheck (in most cases) will get automatically deducted. It is possible to change contributions, but it is nearly impossible to increase or decrease your contributions.
HSAs flexibility for contributions trumps the FSAs strict guidelines.
HSA: 1 – FSA: 1
Ability to roll over unused money
An HSA allows you to roll over all your unused money year after year. If you decide to change employment or insurance, your HSA will stay with you. For instance, if you have an HDHP and have $1,000 left at the end of the year, you will keep that $1,000 even if you change insurance types. At 65, all your HSA money is can be used on whatever expenses you would – even if they’re not medical expenses. On the other hand, an FSA allows you to roll over up $500 assuming you still are on an FSA eligible plan. Any money that is over the $500 rollover is lost. Additionally, you are not allowed to transfer your FSA from an employer to a different employer.
The most attractive option is the HSAs ability to roll over money until you’re 65. At which point you can use that money for whatever you prefer. On the other hand, a use it or lose it option from the FSA is not very efficient and hard to predict.
HSA: 2 – FSA: 1
Ability to invest money
An HSA allows you to invest your money after you passed a certain amount. You can find plenty of different brokers that will help you invest your HSA money. FSAs do not allow you to invest your money due to your inability to roll over large sums of unused money.
Saving and investing is what we harp on here at Why You’re Broke. Plus, the HSA takes the best parts of a Traditional IRA and Roth IRA and combine them together. Easy choice.
HSA: 3 – FSA: 1
Both HSAs and FSAs have similar payment methods. As long you are spending it on a qualified medical expense and have an itemized receipt to submit your HSA or FSA. Once the reciept is submitted you have the option to have the HSA or FSA pay the doctor or facility directly. Another option is using the reimbursement method (which is my personal favorite). I use my points cards to pay for procedures and have my health spending accounts reimburse me. Depending on your HSA, you might also receive a debit card which will allow you to pay upfront as needed.
Similar payment methods. The debit card is interesting, but unnecessary. Push.
HSA: 4- FSA: 2
Which Health Spending Account Is Better?
Based on our scoring, and having used both, HSAs coupled with an HDHP are easily hands down the better choice. Because FSAs have the use it or lose it ability, FSAs are unattractive because you really can’t forecast a lot of your medical expenses. HSAs are without their own flaws either; there is a certain amount of stress the first few years when your HSA is still growing. This stress is easily worth it after you are able to begin investing your money. HSAs become even more lucrative after you turn 65 and are able to withdraw from your investments in your HSA tax-free for any expenses (non-medical expenses included).
If you are pregnant, planning to get pregnant, have a high risk health condition or have a health condition that requires a lot of medical attention it is not in your best interest to get an HSA. Regardless, make sure you speak to a health insurance expert before making any decision.
An HSA might be right for you or might be a terrible decision. The material and information contained on this website is for general information purposes only. You should not rely upon the material or information as a basis for making any business, legal, or any other decision. While we endeavor to keep the information up to date and correct, Bunny Hops To Wealth makes no representations or waranties of any kind, expressed or implied about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information in the above post. Any reliance you place on such material is therefore strictly at your own risk. Prior to making any health insurance decision, make sure you consult a health insurance expert before making any changes.
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