As we come to the end of the year, based on your health insurance, some are rushing to the doctor to use their use it or lose it funds, while others are making appointments for the next year. The group that you are in depends on your health insurance coverage. Do you have a Health Savings Account (HSA) or a Flexible Spending Account (FSA). While similar in some aspects, FSAs and HSAs are very different. However, both HSAs and FSAs are tools for your financial independence toolkit. Take advantage of these plans if you can.
HSA
HSAs are savings accounts that are available to those covered by a high-deductible health plan. A high-deductible health plan is defined by the government, but is typically an insurance plan that only covers preventive services before a deductible is charge.
Minimum Deductible For HSA Account
| Year | Single | Family |
| 2019 | $1,350 | $2,700 |
| 2020 | $1,400 | $2,800 |
For 2019, the minimum deductible for a high-deductible health plan is $1,350 for an individual and $2,700 for a family. For 2020, the minimum deductible for a high-deductible health plan is $1,400 for an individual and $2,800 for a family. If your health insurance plan meets the minimum deductible noted above, you qualify for a HSA account.
In view of the deductibles associated with HSAs, outside of preventive services, the amount you pay for covered health care services before your health insurance plan kicks in is high when compared to other plans. However, HSAs allow those eligible to save on a pre-tax basis to pay for qualified medical expenses, for example deductibles, copayments, coinsurance, and other expenses.
Contributions
| Year | Single | Family |
| 2019 | $3,500 | $7,000 |
| 2020 | $3,550 | $7,100 |
With an HSA account, both you and your employer will contribute to the account. In 2019, you can contribute up to $3,500 for self-only coverage and up to $7,000 for family coverage into a HSA. For 2020, you can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into a HSA. Importantly, HSA funds roll over year to year if it is not spent. Further, an HSA may earn interest or other earnings, and can be invested. As such, a HSA account can be used to grow your money tax free. As an additional benefit, after age 65, your contributions can be used for non medical expenses without penalty.
HSA is said to provide a triple tax advantage:
- Contributions are tax-deductible;
- Withdrawals are tax-free if used to pay for qualifying expenses; and
- Once you reach age 65, non-medical withdrawals are taxed at your current tax rate
FSA
FSAs come as part of a benefits package from an employer and can be used to cover medical expenses. FSAs allow you to set aside money, on a pre-tax basis, for certain health care and dependent care expenses.
Contribution Limits
Like HSAs, the government determines the limits of FSAs. For 2019, FSAs are limited to $2,650 per year per employer. Your spouse can also contribute up to $2,650 in an FSA with their employer as well.
Once you have elected to contribute a certain amount into a FSA, the amount is incrementally taken out of your paycheck. Interestingly, the amount you elect to contribute in a FSA account is available following enrollment for use. As such, if you elect to contribute $2,650, and have $2,500 in qualified expenses, that expense will be covered immediately. However, if you leave your employer in the middle of the year, you will likely need to pay back the funds that you have spent that was not yet taken out of your pay check.
Further, unlike HSAs, contributions to a FSA are typically use it or lose it. Meaning, if your contributions are not spent in that coverage year, that amount does not roll over. However, employers are allowed to:
- provide for a roll over of at most, $500; or
- provide an additional two and a half months to use the money.
Therefore, if you have a FSA, it is important to select a correct contribution limit.
Conclusion
While similar in some aspects, FSAs and HSAs are very different. However, both HSAs and FSAs are tools for your financial independence toolkit. Take advantage of these plans if you can.
| HSA | FSA | |
| Eligibility | High deductible health plan | Employee benefit package |
| Minimum Deductible | 2019 Single: $1,350 2019 Family: $2,700 2020 Single: $1,400 2020 Family: $2,800 | |
| Use It Or Lose It | Unused balance rolls over to the next year | Use it or lose it, unless Employer allows at most 500 to roll over to the next year |
| Taxes & Contributions | Contributions are Tax deductible and Pre-Tax when taken out of pay | Contributions are Pre-Tax |
| Taxes & Disbursements | Disbursements and growth are untaxed | Disbursements are untaxed |
| Contribution Limits | 2019 Single: $3,500 2019 Family: $7,000 2020 Single: $3,550 2020 Family: $7,100 | 2019 Single: $2,650 2019 Family: $2,650 per account |
| Determine Contribution Amount | You can change amount to contribute within the contribution limits at anytime | You can change amount to contribute at open enrollment, a change in employment, or a change in family status |
Use the tools available to your advantage on your journey to financial independence.
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