Here’s the Difference Between HSAs and FSAs (And Why You Should Care)

Health spending accounts
sturti/Getty Images

Grasping the nuances of health spending accounts is about as easy as understanding Latin or the federal tax code.

The thing is, it’s important to know how a Health Savings Account (HSA) or Flexible Spending Account (FSA) can help you make the most of the money you budget for medical expenses.

What’s a Health Savings Account?

Health Savings Accounts can be established by either employers or individuals. Its goal is to help people offset the cost of high-deductible healthcare plans.

In fact, your insurance deductible must be at least $1,300 for individuals or $2,600 for families to even qualify for an HSA.

The federally regulated cap on HSA contributions are $3,400 for individuals and $6,750 for families. People over 55 years old can add an additional $1,000 if they choose.

HSAs can be used to cover all sorts of out-of-pocket medical expenses. They’ve been a huge help in making healthcare affordable to low- and middle-income families who’ve historically struggled under the burden of insurance premiums and deductibles that can run into the thousands.

“Instead of paying $2,640 in premiums like we did in 2014 under a traditional insurance plan, we paid nothing,” TPH contributor Lyndsee Simpson wrote in 2015. “Instead, we will likely finish the year with $597 in our HSA (providing we don’t have any major expenses before the end of the year).”

If your employer sets up an HSA, any contributions you make go with you if you leave your job for any reason.

Unlike a Flexible Spending Account (which I’ll get to in a minute), whatever money you don’t use up during the year rolls over into the next year.

What’s a Flexible Spending Account?

Flexible Spending Accounts can only be set up by employers and are usually offered as part of a larger employee benefits package. Like an HSA, the idea behind it is to help people set aside money to pay medical bills throughout the year.

While HSA contributions are tax-deductible, FSA contributions are added to your account with pretax dollars.  

My husband and I have an FSA account through his employer as part of his benefits package. Here’s how it works:

At the beginning of this year, my husband and I put the maximum allowable amount of $2,600 into our FSA account. The account comes with a debit card that allows us to access those funds to pay for medical expenses whenever they come up.

We can pull money from the FSA to cover the cost of prescription or office visit copays, eyeglasses and contact lenses, and even some over-the-counter medical supplies like the lancets my diabetic husband uses to check his blood sugar.

We can also use it for things that aren’t covered by our insurance like LASIK eye surgery, allergy testing and even sunscreen (really!).

The biggest drawback to an FSA is that you lose whatever money you don’t use up by the end of the year.

It’s unlikely we’ll ever run up against that issue since we usually drain our FSA account by June thanks to expensive prescriptions. I’m just throwing that out there though, because once you put money in your FSA, there’s no taksie-backsies.

Medical Spending Accounts and the Affordable Care Act

Depending on how things shake out politically in the coming weeks and months, we may see major changes to the Affordable Care Act as we now know it — or it could be repealed altogether.

What does that mean for medical savings account contributors? Well, FSA contributors won’t be significantly impacted since ACA members aren’t eligible to participate in FSA programs.

HSA contributors, on the other hand, may take a major hit to their wallets.

“The Affordable Care Act mandates that almost all insurance plans cap out-of-pocket costs (not including premiums or out-of-network care). After you’ve hit the max, the insurer must pay 100 percent of in-network costs,” notes Consumer Reports.

Without that cap, HSA contributors could blow through the money in their accounts more quickly. Indeed, some analysts say out-of-pocket costs could increase by as much as $1,500 by 2018.

HSAs are a great option for stretching your medical expense dollars but they aren’t a panacea because they don’t always cover all the medical bills you’ll accumulate during the year. In fact, even contributing an HSA in the first place is out of reach for many people who may not have available cash to set one up.

Furthermore, when the money’s gone, it’s gone. It’s a budget-buster to suddenly be saddled with additional expenses if you’re used to dipping into your HSA to pay for monthly prescriptions and doctor visits.

The Bottom Line

HSAs and FSAs are terrific programs that are worth exploring if you’ve got the available cash to pay into them.

If you’re already an HSA contributor who’s covered under the Affordable Care Act, start thinking now about how you’ll cover your tab if the ACA is repealed.

You might find yourself suddenly on the hook for a lot more medical expenses than you were expecting when you opened your account.

No HSA? No problem

Contributing to an HSA or FSA not in the cards for you right now? Here’s a few other tips to help you pay your medical bills that you might not have thought about.

Your turn: Do you have an HSA or FSA? Has it saved you any money?

Lisa McGreevy is a Staff Writer with The Penny Hoarder. She’s a travel junkie who keeps her passport in her wallet because you never know when opportunity will strike.