Health Savings Account vs. Flexible Spending Account: Which Is Better for You?

Question: My boss offers both a health savings and a flexible spending account. Which is better?

Answer: Both HSAs and FSAs let you stash money tax-free to pay for out-of-pocket medical expenses. In addition to co-payments and deductibles, you can use the money for a variety of other expenses, including prescription drugs, orthodontia and eyeglasses. The money you save is shielded from taxable income as well as from payroll taxes. But the rules governing them differ, and each has its pros and cons. And generally you can’t sign up for both.

Flexible spending accounts. When you sign up for an FSA, contributions are deducted from your paycheck on a pretax basis. In 2017, the maximum contribution is $2,600. That’s probably not enough to cover your child’s braces, although if your spouse has access to a flex account at work, he or she can also contribute up to $2,600.

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There’s another drawback in addition to the low contribution limit: the use-it-or-lose-it provision. If you don’t spend all of the money in your FSA by year-end, you may have to forfeit the balance. This requirement forces employees to estimate how much they’ll spend on health care over the year when they sign up during open enrollment, and it could bite you if everyone in your family enjoys excellent health and straight teeth. Companies are permitted to give employees until March 15 to spend unused funds or carry over $500 to the next year, but not all do.

One advantage of the FSA is that the entire amount you designate for your account is available on January 1, even though you spread contributions throughout the year. If you spend the entire amount in January and quit your job in March, in most cases your employer can’t go after you for the balance. However, if you leave your job during the year, either by choice or with a security escort, you’ll forfeit any unused funds.

Health savings accounts. You can sock away more money in an HSA each year than in an FSA, and you can carry over unused funds from year to year. Plus, if you leave your job, you can take your HSA with you. Most offer a menu of investment options. Withdrawals are tax-free as long as the money is used for qualified medical expenses. If you use the funds for other purposes, you’ll pay income tax on the withdrawal, plus a 20% penalty if you’re younger than 65.

In 2017, you can contribute up to $3,400 to an HSA if you have an individual insurance plan, or $6,750 if you have a family plan. If you’re 55 or older, you can save an additional $1,000 in catch-up contributions (which aren’t available for flexible spending accounts).

After you sign up for Medicare, you can no longer fund an HSA. But once you turn 65, you can take penalty-free withdrawals for any purpose. However, if the money isn’t used for medical expenses, the withdrawal will be taxed. Finding eligible expenses shouldn’t be a problem, though. You can even pay Medicare premiums with HSA money.

What’s the downside? To contribute to an HSA, your insurance plan must have an annual deductible of at least $1,300 for individual coverage or $2,600 for a family. In 2016, 61% of large employers offered high-deductible plans to their employees, according to Mercer, a human resources consultant. Three-fourths of those employers contributed to participants’ health savings accounts, and the typical contribution was $500. If you’re self-employed, you can set up an HSA as long as you have a high-deductible insurance plan. (Flexible spending accounts are offered only through employers.)

Many banks and brokerages offer HSAs. Consulting firm Devenir offers a list of HSA administrators at www.hsasearch.com.