HSA vs. FSA – Which is Better?
These two healthcare savings options are frequently misunderstood, confused with one another, and under-utilized. Don’t overlook the opportunity to participate in either one, if you have the option available, as they can be great tax and retirement savings vehicles. Let’s take a look at each one more closely.
The Flexible Spending Account (FSA)
Also referred to as a “cafeteria plan” or “section 125 plan”, the FSA has been around as an employee benefit for several decades. Although most workers will have access to such a plan at some point during their careers, many do not take full advantage of them.
Here’s how the FSA works. Each year, you determine how much of your income to contribute to the plan (up to a maximum of $2,600 in 2017). A portion of that amount is deducted from each paycheck over the course of the following year, reducing your taxable income. You can “spend” this money on any medical, dental, or vision expenses that you would have otherwise paid out-of-pocket. The list of eligible expenses is quite extensive and can be found here.
Of course, there are a couple of potential downsides with the FSA. The phrase “use it or lose it” is associated with these plans. If you miscalculate your annual needs and end up with funds that aren’t spent by year-end, there’s no refund or carry-over to a future year. Or if you suffer an unexpected job loss, any unused funds would be forfeited. The other issue is that any amount you elect to defer from your pay cannot be changed until next year’s open enrollment window. There is no flexibility to start, stop, increase, decrease or top-off the account.
Utilized correctly, a taxpayer can increase take-home pay without any increase in actual medical expenditures – that’s a win no matter how you look at it. If the FSA is so great, why would anyone consider using a Health Savings Account (HSA) instead? That’s the question we address next week…
Written By Kimberly S. Baker, CFP®