Choosing between an FSA and an HSA

As the cost of health insurance continues to rise unchecked, we all could use a more affordable health care option. For some, a Health Savings Account (or HSA) is a great way to not only save on health costs today but also put away something extra for future health care needs or retirement.  Click here for a basic introduction to HSAs.

To be eligible to open and contribute to an HSA tax-free, you must first be enrolled in a high-deductible health plan (HDHP). The choice between an HSA and a Flexible Spending Account (FSA) really means deciding between an HDHP and a traditional health plan. The following are a few things to think about when considering whether to switch to an HDHP from a traditional pan.

A high-deductible health plan charges far lower premiums than a traditional plan, such as a PPO or an HMO. With an HDHP, you’re essentially taking the money you would have spent on traditional insurance premiums and depositing it into an investment savings account.  So, for someone who rarely uses health care, a high-deductible health plan along with a health savings account may be a good choice. An HDHP ensures coverage for any big health care expense that might occur, while providing participants a choice of how to pay for small expenses typically covered by traditional plans.  And when you enroll in a health savings account along with a high-deductible health plan, you can budget for future health care expenses using tax-free dollars. Because you’re saving money on premiums and spending money only on care you actually use, you’re better able to control when and how you use your health care dollars.

While FSAs and HSAs are similar in many respects, they’re also very different. It is important to know what those differences are before you make any decision. The comparison chart below highlights the major differences between the two.

At a Glance Comparison...

	HSA	FSA
Pre-tax dollars used for health expenses	YES	YES
Used for out-of-pocket health expenses	YES	YES
Employee contributions allowed	YES	YES
Employer contributions allowed	YES	YES
Employers receive expense deductions for payments	YES	YES
Works under any health plan		YES
Pre-funded	YES	YES
Unused balance rolls over annualy	YES
Investment options with tax-free growth	YES
Portable for participant	YES
Funds can be used for any purpose at retirement age	YES