My wife and I both work and our employers offer different health insurance plans. In fact our employer offered insurance plans couldn’t be more different.
Her employer offers a “traditional” health insurance PPO plan with a decent monthly premium (in the $100 to $150 range for family coverage) and a $30 copay. She also has the option of using a Flexible Spending Account.
On the other end of the spectrum my employer offers a high deductible health plan (HDHP) that is teamed up with a Health Savings Account. My employee plus one dependent deductible is $2,400 annually with copays kicking in after that. The cost is about $200 per month. And note that isn’t even full family coverage! It only covers me and one dependent (spouse or child). If there were three of us the cost jumps up to over $300 per month.
With the HDHP my employer kicks in a bit of money to help kickstart your HSA savings to offset that enormous deductible, but it isn’t the whole deductible.
As you might expect we use my wife’s coverage because it is so much better than my employer’s coverage. I thought I’d use my own story to explain the differences between FSAs (that my wife’s employer offers) and HSAs (that my employer offers).
What is a Health Savings Account (HSA)?
A health savings account is a contribution account that is funded to pay for healthcare expenses. It is tied to a specific type of health insurance plan called a high deductible health plan.
HSAs can be funded by either the employee or employer throughout the year. A key benefit for the employee is the contributions are tax deductible. It’s kind of like a 401k. You put money into the HSA and you get a break on your taxes this year.
Unlike a 401k as long as you use the HSA funds for eligible medical expenses you won’t pay taxes on the money. That means you’ve gotten a tax deduction and have never had to pay taxes on the contribution.
Another set of perks of HSAs is the employee owns the account and can hold onto the funds forever. You don’t have to use the funds by the end of the year.
What is a Flexible Spending Account (FSA)?
FSAs are very similar to HSAs in that they are contributions accounted that are funded to pay for healthcare expenses. The FSA is tied to a health insurance plan like a PPO. Contributions are tax deductible just like HSAs.
In fact other than the types of insurance the FSA is tied to the accounts are nearly identical in use.
Except for one thing…
Key Difference Between HSAs and FSAs
The primary difference between the two accounts is how long you can hold on to the money inside the account.
Health Savings Account funds can be held on until retirement if you choose.
Flexible Spending Accounts are a “use it or lose it” account. That means you have to use the funds inside the FSA before the end of the plan coverage period (usually the end of the year). If you set aside $1,000 during the year (woohoo $250 tax break!) and only spent $700 of that money you will lose $300 at the end of the year.
How will you lose it? Pretty simple. You forfeit the unused funds. Where do they go? Either to the plan for “administrative costs” (wink wink, thanks for the new furniture in the executive offices) or gets doled out to plan participants as income.
Yea, you don’t want that. So make sure that if you’re using the FSA that you end up using every last cent of the funds before you lose them.