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HSA Or FSA: Which Is Better For Medical Savings?

Health insurance deductibles and co-payments, plus uncovered items like braces for children, can put a dent in one’s bank account.


Individuals put money away tax-free to pay for out-of-pocket health-care expenses into Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA).  This strategy is generally considered a good one.  What’s better, the saved money from an FSA and an HSA lowers one’s reported taxable income, just like contributing to a retirement account.  Which is the best, though, an FSA or an HSA?


First let’s look at how they are constructed.  Individuals can enroll into these health accounts during their employer’s open enrollment period, which usually runs through December.  Individuals also can enroll if they have a “qualifying life event,” such as a change in marital status, a new child, the death of a spouse or dependent.  If an individual takes a new job, they can sign up within 30 days.


Most employers don’t offer both an FSA and an HSA and, usually if they do, employees can’t get into both.  If given a choice, knowing the differences is important.  Among other things, employers can put more money into an HSA and roll it over into a new year.  An FSA lets one take money out even before they have contributed to it.


Flexible Spending Accounts:


For 2018, the maximum contributions individuals can make is $2,650.00 and this rises to $2,700.00 in 2019.  That’s not a lot, but if one’s spouse has health coverage, he or she can open another FSA.


A big downside is the use-it-or lose-it rule.  Should one fail to spend all the money in their fund by year-end, they lose it.  As a result, individuals have to estimate how much they will need to pay themselves in the coming year.


At least, companies have the option of giving employees until March 15 to spend leftover money or even keep up to $500.00 in the account until the next year.  Many don’t do that, though.


The good thing is that individuals can start spending the whole sum they designated for the year ahead on January 1st, even though their contributions are spread over the ensuing 12 months.  Leave the employer and one can’t take the money with them, as one would with a retirement account—or an HSA.


Health Savings Accounts:


The advantage here, of being able to sock away more money and not forfeiting the unused amount on December 31, is considerable.


In 2018, a single person can save $3,450.00 in an HSA and in 2019, $3,500.00.  A family: $6,900.00 and $7,000.00.  Further, if someone is 55 and older, they can put an extra $1,000.00 as a catch-up.  In addition, self-employed people can create an HSA for themselves, but not an FSA.


However, HSAs have their weaknesses.  To set one up in both 2018 and 2019, health plans need to have a yearly deductible of $1,350.00 for an individual and $2,700.00 for a family.  That’s a bit steep.


Regardless, either plan can be beneficial income tax-wise.  Utilizing FSAs and HSAs can be smart moves to be considered within a strategic income tax plan.  However, the strategy is technical and depends on one’s personal circumstances. 


Please note that the reader should discuss all strategies stated above with their accountant and/or legal advisor before implementing any of the above listed strategies.


Legend Financial Advisors, Inc.® (Legend) is not a tax or legal advisor.  It is Legend’s intention to merely present ideas and strategies to readers to discuss with their own tax and legal advisors or in conjunction with Legend’s advisors.

©2019 Legend Financial Advisors, Inc.®. All rights reserved.