Open enrollment season is just right around the corner. The annual ritual of choosing a health insurance plan can be intimidating and downright overwhelming. Having too many options can drain our mental energy and prompt us to blindly choose a plan just to get it over with.
However, we encourage you to look at your health benefits package closely to sign up for the right plan that fits your needs, particularly if your work offers you a flexible spending account (FSA) and/or a health savings account (HSA).
What is an FSA and HSA? And which should you sign up for?
You can think of an FSA and HSA as a personal savings account to pay your out of pocket medical costs such as copayments, deductibles, prescription costs and other qualified medical expenses that are not covered by insurance. Both plans allow you to set aside pretax dollars, which then reduces your taxable income.
So, which plan should you choose?
Firstly, not everyone is eligible for an HSA and not all employers provide it as an option. This account is only available to those who have a high-deductible health plan (HDHP). For 2019, a plan must have a minimum annual deductible of $1,350 for self-only and $2,700 for a family to be considered a HDHP. Additionally, you can’t have any other health coverage (including Medicare) or be claimed as a dependent on someone else’s tax return.
With a Health FSA on the other hand, the only requirement to participate in it is simply having an employer who offers it and you sign up.
If you are eligible for both, let’s further explore the differences between the two:
Annual Contribution Limits
HSA: $3,500 for self-only or $7,000 for family
Health FSA: $2,650
Eligibility
HSA: Must have a HDHP
Health FSA: Have an employer who offers the plan
Rollover
HSA: Unused balances rollover into the next year.
Health FSA: You forfeit any unused balance. Some employers may offer a grace period to use funds or allow you to rollover $500 into the new year.
Changing Contribution Amounts
HSA: You can change the amount you contribute at any time, as long as you do not exceed the annual contribution limit.
Health FSA: Your contribution amount is determined during enrollment period. This amount can only be changed if there is a family status change (marriage, divorce, birth of child, etc.)
Withdrawals
HSA: You can only use the money you’ve already contributed. You do not pay taxes on money you withdraw for medical expenses.
Health FSA: You have access to the full amount before you contribute it all and can withdraw it at any time, up to the amount you have chosen to contribute for the year. You do not pay any taxes on money you withdraw for qualified medical expenses.
Penalties
HSA: If you withdraw money for non-qualifying purposes before age 65, you pay taxes plus a 20% penalty. After age 65, money can be withdrawn without penalty. However, if it is not used for qualified medical expenses, it will be taxed.
Health FSA: Employers have flexibility in designing their FSA plan. Thus, the penalty for using the account for non-qualifying medical expenses can vary.
Ownership
HSA: Account belongs to you and is yours to keep, even if you get a new job.
Health FSA: Account belongs to employer. If you change jobs or fail to spend the funds annually, they are forfeited.
THE BOTTOM LINE:
Choosing the right plan can be complicated. A good place to start is to make a list of your anticipated prescription costs, doctor’s visits and any treatments or surgeries for the year. Of course, medical emergencies can occur at any time, which can make it challenging to plan for healthcare costs. However, having a general idea of your anticipated medical expenses can help you make the best decision.
Contributing to either may help lower your tax liability.
If you qualify for both plans, consider choosing the HSA simply because you can contribute a higher amount and carry over your contributions from year to year.
