The cost of healthcare in the U.S. has been increasing for decades. And it doesn’t show signs of slowing down. According to National Health Expenditure data from the Centers for Medicare and Medicaid Services, healthcare spending reached about $1.4 trillion in 2000. And in 2019, health expenditures more than doubled to $3.8 trillion. By 2028, Americans are projected to spend a whopping $6.2 trillion on healthcare.
That’s why it’s more important than ever for the average household to find ways to save money. But navigating the healthcare benefits landscape can be challenging, especially over the last year. Even though account holders contributed almost $42 billion to their health care spending (HSA) accounts in 2020 (up 8% from 2019), consumers are still confused about the differences between HSAs and flexible spending accounts (FSAs). In fact, one survey revealed that only about 13% of Americans currently have an FSA, and approximately 17% have an HSA. Unfortunately, that means most Americans are missing out on substantial tax and savings benefits.
Both HSAs and FSAs allow you to save for medical expenses by using pretax money to pay for qualified medical costs. But while they are similar in some ways, each offers unique features and benefits. Let’s examine some of the most significant differences.
#1 HSA vs FSA Enrollment
Any person enrolled in an HSA-qualified high-deductible health plan can open an HSA—including the self-employed. The only exceptions are that you cannot be eligible for Medicare or claimed as a dependent on another person’s tax return. On the other hand, you can only open an FSA if your employer includes it as part of your benefits. That means that in most cases, self-employed and unemployed individuals are not eligible. Also, in general, you can’t enroll in both an HSA and FSA simultaneously unless you have a limited-purpose FSA that only covers certain expenses. Also, you are allowed to have both an HSA and dependent care FSA at the same time. This option offers an excellent way to pay for child and dependent care.
#2 Contribution Limits
For 2021, individuals can contribute up to $3,600 to their HSA. Families can contribute up to $7,200. Also, anyone 55 or older is eligible for an extra $1,000 catch-up contribution. For FSAs, the contribution amount is $2,750 regardless of whether you file as a family or for yourself. And no catch-up contribution is available.
You can always withdraw funds from an HSA tax-free if they are used for qualified health care expenses. But if you use them before the age of 65 for nonmedical costs, they are subject to a 20% penalty and must be declared on your income tax return. On the flip side, with an FSA, withdrawals are typically not allowed for any reason outside of the specified guidelines.
#4 Spending Limits
HSAs can be rolled over every year without penalty. For FSAs, if you don’t use all the funds, you may either have a grace period to spend them or the option to roll over up to $550 into the following year based on your employer’s discretion. Otherwise, the unused money is forfeited. Although for 2021, employers have the option to allow you to roll over remaining FSA funds into 2022.
The most significant difference between HSAs and FSAs is that you control an HSA and can rollover contributions. In contrast, FSAs are more rigid and are owned by your employer. So, if you leave your job, the funds in your FSA are forfeited while you can keep funds in your HSA. You are also able to roll those funds over into another HSA account and choose your own provider. HSAs allow more flexibility because you can change your contribution amount at any point during the year if you don’t exceed the limits. With an FSA, you are generally locked into the contribution amount you chose during open enrollment. And finally, with an HSA, your interest is tax-free, and you can invest your funds. FSAs never earn interest and cannot be used as an investment vehicle.
Now you may be thinking, which is better? Overall, the higher limits and ability to roll over funds make an HSA the preferred choice if you qualify. HSAs are also more flexible and allow you to accumulate savings over time. In most cases, the choice will depend on your work situation and insurance deductible.
But it doesn’t have to be overwhelming. Begin by doing your research to understand the ins and outs of HSAs and FSAs to determine which is best for you and your family. And don’t hesitate to reach out to your employer with questions. By taking the time to make the right choice, you’ll be making a significant investment in your financial well-being.
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