FSAs vs HSAs: Handling Healthcare Expenses

The landscape of the American healthcare system has changed dramatically over the past decade, as the passage of the Patient Protection and Affordable Care Act (PPACA) has given Americans more options than ever to cover their healthcare costs.

Let's weigh the pros and cons of FSAs vs HSAs, to help you make an informed choice.

Flexible Spending Accounts (FSAs)

Pros

-Through the use of regular payroll deductions, FSA account holders can set aside tax-free money that they can use on FSA eligible medical services and products. This can reduce the amount that a worker pays in taxes during each pay cycle.

-Over-the-counter (OTC) medicines can be purchased with an FSA after obtaining a prescription from a doctor.

-Employers can offer either an extended grace period (2.5 months) at the end of an employee's FSA year or the option to carry over up to $500 into the next year.

-There are no reporting requirements for FSAs on federal income tax returns.

-Each year, employees cancontribute up to $2,550 into their FSAs. You and your spouse could collectively contribute up to $5,100with separate accounts. Keep in mind spending deadlines, to make sure you use the plan for expenses throughout the year.

Cons

-FSA account holders can itemize their deductions, but they cannot apply their FSA expenses when itemizing. This is considered “double dipping" by the IRS and is prohibited.

-Medical expenses like healthcare premiums, long-term care expenses and amounts covered under another health plan are not applicable with an FSA.

Healthcare Savings Accounts (HSAs)

Pros

-HSAs function similarly topersonal savings accounts but instead used for healthcare expenses.

- Individuals can contribute up to $3,350 annually, while married couples filing jointly can contribute $6,750 each year.

-Contributions into an HSA areconsidered tax-free money.

-Employers can contribute to an HSA.

- Employees have direct control over spending and the funds will remain theirs even after switching jobs.

-Any unused money at the end of the year will be accessible during the next calendar year.

Cons

-Only individuals with a qualifying High-Deductible Health Plan (HDHP) and no other first-dollar coverage are eligible for an HSA.

-An account holder will be taxed and given a 20% penalty if he/she uses the HSA for something that's not qualified as eligible. Note: Money will be available for personal use without penalties once the account holderreaches 65 years of age.

-Account holders who want to invest in their HSA funds must meet a minimum HSA balance of $2,000. This isbefore putting money in a separate, non-insured HSA investment account.

Ultimately, your decision between FSAs and HSAs will come down to what exactly your employer can offer you in terms of benefits, what sorts of health plans are feasible for your financial bottom line and how much you expect to spend on qualifying healthcare expenses and products over the course of a year.

If you have any questions about your consumer-directed healthcare account, feel free to submit a question in our FSA Learning Center , or explore the spending potential of your account with our FSA Eligibility List .

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