Ways an HAS ( Health Savings Account) is Better Than an FSA ( Flexible Spending Account)
Wondering which is the smarter move, putting money into a Health Savings Account or putting it into a Flexible Spending Arrangement? Although you may be forced to choose one over the other because of eligibility rules, if you have the choice, an HSA offers several advantages over an FSA. Here are six of the biggest reasons an HSA is better than an FSA.
You Own Your HSA. Your Employer Owns Your FSA.
Your Flexible Spending Arrangement is technically owned by your employer, not by you. When you contribute money to your FSA, you’re putting money into an account you don’t own. Granted, you can then use the money to pay for your out-of-pocket medical expenses—but there’s also a chance you can lose the money in your FSA.
If you leave your job and there’s money in your FSA, that money—the money that came from your paychecks—is forfeited to your employer. You could even lose the money in your FSA if you don’t lose your job. At the end of each year, the unspent money remaining in your FSA is forfeited to your employer. Although your employer has the option to roll over up to $500 remaining in your FSA for you to use the following year, or to allow you a 2.5 month grace period in which to use up the money at the start of the new year, it’s not obligated to do so.1
By contrast, since you own your HSA, you never forfeit the money in it. It’s all yours. You manage it. You decide how it’s spent. You call the shots. The money just rolls over from one year to the next, and if you don’t need to use it for medical expenses, it just continues to accumulate.
You Can Invest the Money in Your HSA, but Not Your FSA.
When you put money into an FSA, the money sits there doing nothing until you either spend it on out-of-pocket medical expenses or forfeit it.
When you put money into an HSA, you can invest that money, as long as you select an HSA administrator that offers investment options (if your HSA is established through your employer, you’ll likely have to use the HSA administrator that your employer selects—but you can then transfer the money to a different HSA administrator at any point). The interest and earnings from your investments grow tax-deferred like they do in a 401(k) or an IRA.
When you withdraw the earnings and use the money for a qualified medical expense, you don’t pay income taxes on it. It’s hard to beat an investment that’s tax-deductible when the money goes in, grows tax-deferred, and is tax-free when it’s withdrawn (if you withdraw for something other than medical expenses, you do have to pay tax on it, plus a penalty if you make the withdrawal prior to age 65).
You Can Have an HSA Even Without a Job.
Your FSA is linked to your job. You can’t start an FSA on your own. FSAs are part of an employee benefit plan.
Your HSA isn’t necessarily linked to your job. You can start an HSA even if you’re unemployed. While some employers help employees set up an HSA and some even contribute funds into employees’ HSAs, the HSA itself isn’t linked to the job. If you lose your job, the HSA and all of the funds in it—even the funds contributed by your employer—are yours to keep.
One caveat: to start or contribute to an HSA, you must have an HSA-qualified High Deductible Health Plan or HDHP. If you don’t have an HDHP, you cannot contribute to an HSA. If you open an HSA while you have an HDHP and then later lose your HDHP, you may keep your HSA and continue to take withdrawals. However, you can’t make any more contributions to your HSA until you’re covered under an HDHP again.
Lose Your Job? You Can Pay for COBRA With an HSA but Not an FSA.
COBRA continuation health insurance premiums count as an eligible medical expense for your HAS.
If you lose your job and you decide to keep your job-based health insurance plan through COBRA, you can withdraw money from your HSA to pay the monthly premiums. You won’t pay income taxes or penalties on funds withdrawn from your HSA for this purpose.
However, you may not use the funds in your FSA to pay health insurance premiums, even for COBRA.
Your HSA Is Another Way to Save for Retirement.
An HSA can be used as a vehicle to stash away tax-deferred savings for retirement, yet still have the funds immediately available if a medical need arises.
While these funds are technically earmarked for unreimbursed medical expenses, once you turn 65, you may take withdrawals from your HSA for any reason without paying a penalty. If you use HSA funds for eligible medical expenses, you don’t pay income taxes on withdrawals. If you withdraw funds for non-medical expenses after you’re 65, you’ll pay income taxes on the funds, but no penalties.
Once you turn 65, you may use your HSA funds to pay premiums, however you cannot pay for supplemental coverage like with HSA funds.
Unlike an IRA, there is (so far) no requirement that you take a minimum distribution each year from your HSA. You can leave the money in there, growing tax deferred, for as long as you like (some people consider their HSA to be a source of funding for custodial long-term care that they may need towards the end of life). And yes, your HSA can go to your designated beneficiary upon your death.
Contribution Limits Are Higher for HSAs
In 2019, if you have HDHP coverage for just yourself, you can contribute up to $3,500 to an HSA, plus an additional $1,000 if you’re 55 or older (the contribution can be from you or your employer, or a combination of both). If you have family coverage under an HDHP, you can contribute up to $7,000 to an HSA in 2019, plus the $1,000 catch-up contribution if you’re 55 or older. In 2020, these upper limits are $3,550 and $7,100, respectively.3
With an FSA, however, the maximum contribution limit for 2019 is $2,700 (regardless of whether the employee has family health insurance coverage or single coverage).
Both FSA and HSA contributions reduce your adjusted gross income, but HSA contributions have the potential to lower your AGI more than FSA contributions.
- Internal Revenue Service. Publication 969. Health Savings Accounts and Other Tax-Favored Health Plans.
- Internal Revenue Service. Revenue Procedure 2018-30.
- Internal Revenue Service. Revenue Procedure 2019-25.
- Internal Revenue Service. IRS: Plan now to use Health Flexible Spending Arrangements in 2019. November 16, 2018.
- US Department of the Treasury Resource Center FAQs. http://www.treasury.gov/resource-center/faqs/taxes/pages/health-savings-accounts.aspx Accessed August 20, 2014.
- 26 US Code § 223. http://www.law.cornell.edu/uscode/text/26/223 Accessed August 20, 2014.