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HSA vs. FSA: What’s right for you?


A common complaint heard in my 20+ years in the industry is trying to understand what exactly a Health Savings Account (HSA) and a Flexible Spending Account (FSA) are, along with discerning which one is best for your company. This article will give a brief definition of each, and outline some of the pros and cons.

What is an HSA?

An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and other qualified medical expenses, you may be able to lower your overall health care costs. HSA funds generally may not be used to pay premiums.  You can contribute up to $3,600 for individual coverage in 2021 and $7,200 for family.

What are the advantages of an HSA?

The first advantage of an HSA is that it allows for tax-free withdrawals. There is no tax penalty for using the funds in your HSA. Another benefit is that unused funds can be rolled over to the next plan year. If you have a year with low plan usage, this could benefit you the following year when a surgery or chronic health condition could occur. Additionally, HSAs offer portability if you retire or change employers. This option allows individuals to have even greater flexibility with their money. Lastly, over-the-counter medicine can also be purchased with an HSA.

What are the disadvantages of an HSA?

The biggest disadvantage with an H.S.A. is the high plan deductible. First and foremost, a High Deductible Health Plan (HDHP) with no upfront co-pays must be offered with an HSA.  (Whether or not it makes sense to have an HDHP depends on your life stage and the associated medical expenses you’re likely to incur. If you’re young and healthy and rarely go to the doctor, you’ll probably save a lot of money by choosing an HDHP since the premiums are lower. If you’re planning to have a baby soon, an HDHP might not be a good choice, since the costs of hospital childbirth are high and your out-of-pocket expenses could easily exceed the plan’s annual out-of-pocket maximum.) Additionally, expensive prescription medications will count towards the high deductible with an HSA, instead of a fixed co-pay. An example of this is when you may need a brand name drug to treat high blood pressure.  The brand medication without a co-pay could range between $200 to $500 per month.

What is an FSA?

Let’s shift gears and talk about Flexible Spending Accounts.  An FSA is a savings account used to pay for certain out-of-pocket health care costs tax-free.  The employee normally funds the FSA, unlike an H.S.A. where both employer and employee can contribute towards the account.

What are the advantages of an FSA?

The primary advantage of an FSA is that the contributing funds to the account are deducted from your earnings before taxes, hereby lowering your taxable income. Who doesn’t want to pay lower taxes? Another advantage is that you can save money on everyday items, such as over-the-counter medicine, glasses, contacts, crutches, or even band-aids.

What are the disadvantages of an FSA?

It is important to look at the disadvantages with an FSA. First, funds do not automatically rollover, unlike an HSA, unless you set the plan up to do so. So, if you do not use all FSA funds during the plan year, you lose them. Next, FSAs are tied to your employment.  If you lose your job, the employer can keep the funds, unless you are eligible for and are offered COBRA for the FSA.

Have additional questions about HSA or FSA?

Don’t forget–I offer free consultations! Call now if you need help figuring out which option is the best for your team’s unique situation.

Billy M. Austin, Jr.,

Partner at Van Popering Insurance

(704) 277-6964