financial planner Stephen Zelcer
What is the difference between FSA and HSA?

What is the difference between FSA and HSA? Updated 2020

Both accounts allow you pay for qualified medical expenses with tax-free money (thus avoiding Federal, State, Social Security, and Medicare taxes – usually around a 37.65% tax savings).

Here’s how the accounts differ:

  • Contribution Limit: FSA has a maximum contribution limit of $2,750.  HSA limits are higher; $3,600 for those with a self-only health plan, $7,200 for self+1 or family plans.  Thus, the HSA will save you more in taxes.
  • “Catch-up” contributions: FSA does not allow “catch up” contributions.  HSA allows a $1,000 for those age 55+, which adds to the total tax savings.
  • Use or Lose: FSA money is subject to “Use or Lose.”  This means the FSA money is only available to pay for eligible medical expenses incurred by December 31st.  Any expenses incurred after December 31st are not covered. If you have leftover money, only $550 will “carryover” into the next year (assuming you sign up for FSA again). Any amount over $550 is lost. With HSA there is no “use or lose.”  If you didn’t use your balance by year’s end, it rolls over in to the next year.
  • Account Max: An FSA cannot accumulate more than the $2,750 contribution + a $550. An HSA has no account max. This means you can make full HSA contributions even if you carried-over your enitre prior-year’s contributions, thus allowing you to accumulate tens-, if not hundreds of thousands of dollars in your HSA account.
  • Invest account balance: FSA does not allow you to invest and grow your account. HSA, on the other hand, allows you to invest your account (in mutual funds or ETFs).  This can help you grow your HSA substantially so it can provide tax-free dollars to you in the future, for a time when your health-related expenses may rise (i.e. retirement).
  • Can access funds in retirement:  FSA funds are not available once you separate from service.  HSA funds are available even after separation, even in retirement. Remember, HSA funds are tax-free for qualified medical expenses (unlike your TSP or IRA which will be taxable even if used for qualified medical expenses). (Oh, and by the way, there are no income limitations to prevent you from participating in HSA, unlike IRAs.)
  • Broader range of Qualified Medical Expenses:  There are some expenses that are not considered qualified expenses for FSA but are considered qualified expenses for HSA. Here are a few notables:
    • Long term care insurance premiums:  Not covered by FSA but is covered by HSA.
    • Medicare Part B premiums: Not covered by FSA but is covered by HSA.
    • Non-prescription drugs and services: Usually not covered by FSA, but in 2020, due to Covid-19, these become covered. HSA typically covers non-prescription drugs and services (like a massage at a spa – ahh!).

Can you do both at the same time?
No. You will have to chose one over the other. (However, see my comments below about the LEX FSA.)

Which one has the advantage?
Based on the bullet points above, HSA has the clear advantage. I describe HSA as “FSA on steroids!”
So, why in the world would you not do HSA over FSA?”

There may be two reasons:

Reason #1 – Not eligible to participate in HSA:
To be eligible to contribute to an HSA you cannot covered by a non-HDHP plan including:

  • A spouse’s non-HDHP plan.
  • Any part of Medicare (Parts A, B, C or D).  Even though Medicare Part A is FREE, it may cost you your ability to contribute to HSA.  (Ask your HDHP plan provider about HRA.)
  • Tricare (although you can receive VA benefits and still be eligible for HSA)

Reason #2 – HSA Requires a HDHP:
HSA requires a high deductible health plan (HDHP).  The minimum high-deductible that an HSA plan can have is $1,400 for self-only plans or $2,800 for self+1 or family plans (2021).  Having a high deductible means that, in a given calendar year the first $1,400 or $2,800 of medically related expenses will have to be paid by you.  (This does not apply to preventative care.  HDHP plans cover preventative care immediately even if you haven’t satisfied your deductible.)

Is a high deductible plan bad?
No. A high deductible means you chose to self-insure on your small expenses, and rely on insurance help only for large expenses (which is the whole purpose for insurance anyway).

The high deductible plans (HDHPs) thru FEHB provide four financial benefits:

  • Lower insurance premiums
  • Premium “pass though” where they put money into an HSA account for you to use on medical expenses.
  • Your own HSA contributions which lowers your taxes (as we said earlier)
  • Many of the HDHPs thru FEHB have lower maximum-out-of-pocket limits compared to the non-HDHPs. This reduces how much you’d come out of pocket should you ever have a year of high medical expenses.

Use the LEX FSA for Dental & Vision Expenses:
I mentioned above that you cannot participate in an FSA and HSA at the same time, but you could do a LEX FSA and HSA at the same time. LEX FSA is just like a regular FSA except is it limited to cover only dental & vision expenses. If you anticipate any dental and/or vision expenses in the upcoming year, just fund those expenses via the LEX FSA. This will allow you to avoid touching your HSA and keep in accumulating and growing into the future.

Good litmus tests to see if HSA is right for you:

If you fit into any of these categories, you should strongly consider a HDHP with the HSA:

  • You never reach your deductible
  • You don’t fully fund your FSA
  • You do fully fund your FSA but don’t exhaust the funds until June or later (and only count medical expenses towards “exhausting” your FSA. Do not include your dental & vision expenses, because, remember, you could use LEX FSA for those).
  • You don’t even know who your doctor is

If you’ve been scared of the HDHP plans until now, you should really reconsider your position. I typically find that when people move from a non-HDHP to a HDHP and participate in the HSA (and also the LEX FSA), their savings add up multiple thousands of dollars.

If you are looking for this type of financial planning guidance on a personalized level, request a 1-on-1 meeting in the form below.

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