It’s Open Enrollment season for most people. I figured I would spend a few minutes talking about one of the more common conversations I have with clients as we review their enrollment packages. The HSA vs the FSA. Why? Well, because they get used interchangeably, but they are two different animals. I’m going to bullet-point the highlights of these two vehicles, both of which are designed to help you cover out-of-pocket medical expenses. Let’s get right to it.
The HSA – Health Savings Account
- All contributions go in before taxes. The balance then grows tax-free and distributions are without taxes as long as they are used for medical-related expenses.
- You can only participate in HSA if you are in a high-deductible healthcare plan (HDHP).
- The annual contribution for 2021 is $3,600 for single or $7,200 for family (up $50 and $100 respectively from 2020 contribution limits).
- At age 55 you are provided a $1,000 catch-up.
- HDHPs have minimum deductibles and maximum out-of-pocket amounts. I won’t cover those here, but this is a good link if you want more details.
- THERE IS NO “USE IT OR LOSE IT” WITH AN HSA!!!
- NOTE – once you are enrolled in Medicare you can no longer contribute to an HSA. However, if you continue to work past age 65 you may not wish to enroll in Medicare. This is something you must discuss with your CFP®.
Flexible Spending Accounts (FSA)
- Contributions go in before taxes. Withdrawals are without taxes as long as used for medical-related expenses.
- The contribution limit for 2021 is $2,750. This stays the same from 2020.
- You may be able to rollover an unused FSA amount of up to $550 in 2021. Individual employers determine if the plan allows a rollover, however, the amount cannot exceed $550. Otherwise, unused funds are lost.
- NOTE - If you have an HSA, you may be able to do what is called a Limited FSA. This can only be used for vision and dental care services. Check with your employer to see if they allow this in your benefits plan.
Alright, so those are the highlights. Here is where I share my opinion on them.
First, if you are not in a HDHP and are only eligible for an FSA I would encourage you to strongly consider participating in one. Becaues it is a “use it or lose it” type of plan you need to make sure you will use up the funds, minus the $550 your employer may allow you to roll to the next year. This takes a bit of planning. If someone is having major dental work next year it probably makes sense. Or, in my case, I did LASIK this year so maxing out my wife’s FSA was an easy decision. However, if you do not have a lot of normal or any planned medical costs it may not make sense for you to do a Flexible Spending Account, at least to the max.
With an HSA – DO IT!!! Seriously, if you have access to a Health Savings Account because you are in a high-deductible healthcare plan – enroll in the HSA no matter what! Okay, maybe not “no matter what,” but odds are high you will use the funds for medical-related expenses in retirement. What is that – an HSA can be used in retirement? Yes, that is the big advantage with HSA plans. Because there is no “use it or lose it” rule with HSAs, you can invest the funds where they can grow without taxes and you can then use them down the road in retirement. HSAs have the triple tax-advantage to them. Heck, I advise my clients with HSAs to max them out annually and not touch them, besides choosing where the funds will be invested. Current medical expenses are then paid out of cash flow. The HSAs can grow until they need them in retirement. Think of the HSA as a combination of an IRA and a Roth.
That’s it for the highlights of the differences between Flexible Spending Accounts and Health Savings Accounts. Hopefully you have a little more clarity with them. As always, talk to your benefits person and/or your CFP® regarding your specific situation. I don’t know about your advisor, but I work my clients on their open enrollment options this time of year.