Medical savings accounts (MSAs) exist in order to make healthcare services more affordable for Americans. The history of MSAs dates back to the 1990s and, over time, the type of MSAs available has evolved. Today two main, tax-friendly options are available to both individuals and employers looking for healthcare peace of mind: Health Saving Accounts (HSAs) and Flexible Spending Accounts (FSAs).
Broadly speaking, anyone – be they employed, self-employed or unemployed – can contribute to an HSA if they qualify. While both employer and employee can make contributions to an FSA.
Those are the broad brushstrokes, but when you dig a little deeper there are some important differences between these two options, which you should discuss with your investment manager before making a decision.
To help you decide on the best option for you, the blog takes you through the core differences and similarities. If you need more specific advice, tailored to your particular circumstances, I invite you to get in touch so we can find the right fit for you.
HSA or FSA: Which Medical Savings Account Is Best for You?
We’ll delve into the tax implications in a little more depth later in this blog, but to open the conversation, let’s take a look at contributions, limits and some red-tape issues.
Health Saving Account (HSA)
- Contributions: You can change your HSA contributions at any time, up to the annual limit.
- Limits: For HSAs, the maximum contribution limit for 2023 is $3,850 ($3,650 in 2022) for self-only or $7,750 ($7,300 in 2022) for family coverage. For those older than 55, an additional contribution of $1,000 annually is allowed.
- Usage: Funds in an HSA can be rolled over from year to year, and the money in the account can be invested to give the holder the added advantage of benefitting from compound interest.
- Changing Jobs: HSAs are owned by the holder, so they move with the employee from job to job.
- Availability: Not all employers offer the HSA option, but this does not stop individuals opening their own HSA and contributing independently – but this does mean you’ll have to cover FICA taxes of 7.65% which would normally be saved by the employer. If you aren’t sure if you qualify for an HSA, then check out this Investopedia article for more information or give me a call to discuss in more detail. Be aware that you can only make HSA contributions if you have a qualifying high-deductible health plan (HDHP).
Flexible Spending Account (FSA)
- Contributions: When you enroll you determine upfront how much you’ll contribute annually, and once this decision is made you can’t change it – that is unless you can show a qualifying life event, like having a child or getting married.
- Limits: In 2022, the limit for a single FSA holder is $2,850. Married couples, if both employers offer an FSA, can double this amount per year.
- Usage: With an FSA, you have to use the funds or you lose them as the funds expire at the end of each year (unless your employer allows a carryover or grace period). The maximum carryover for 2022, as set by the IRS, is $570.
- Changing Jobs: If you change employers, then you’ll lose the funds in your FSA. Because FSAs are owned by the employer, these funds go back to the employer.
- Availability: Most full-time employees qualify for an FSA if their employer offers health insurance.
A Word on Tax and Retirement
A key financial advantage of both an HSA and an FSA is the tax saving potential. Both are funded pre-tax, which ultimately saves you money.
However, as a wealth advisor there are other considerations to consider over and above tax. An HSA really shines through when you start getting into the details and considering how these accounts can also be used as part of your retirement planning if you take advantage of the ability to invest excess funds in mutual funds, exchange traded funds and stocks.
HSAs are regarded as ‘triple tax advantaged’. In practice this means that contributions are made on a pre-tax basis, growth is tax free and withdrawals (for qualified medical expenses) from the account are also tax free.
Plus, when the holder turns 65 it is possible to withdraw all the funds from an HSA for any expense, not just medical needs. These funds will be taxed as income, much like an IRA or traditional 401(k).
Can I Have Both an HSA and an FSA?
With healthcare costs outpacing inflation, it is understandable that American families are increasingly looking for ways to cushion the blow of these expenses. For those who can afford it, additional coverage is a key question which people-focused investment managers like Mottet Wealth are often asked.
The answer is: It’s complicated.
If you already have an HSA, then you can only open a limited purpose FSA or a dependent care FSA.
A limited purpose FSA allows you to pay for qualified dental and vision expenses using pretax dollars. This includes dental fillings, vision exams and new prescription glasses. You cannot use the account for anything but dental and vision-related costs.
A dependent care FSA covers employees, using tax-exempt funds, for childcare expenses such as daycare incurred while the parent or guardian is at work. It can also be extended to cover adult dependent costs.
Seek Out Professional Guidance
Both HSAs and FSAs come with pros and cons, but the key to making the right choice for your needs lies in the type of coverage you are after and the ins and outs of your long-term wealth plan.
For some, a HSA as part of a HDHP might be too costly as an option, making the FSA a better choice. For others, the retirement savings approach might be the clincher.
As always when faced with a complex choice, speaking to a professional is the best place to start. As a fee-only investment advisor, you can be 100% confident that my advice places you at the center. Please do reach out if you have any questions and I’ll be happy to help.