HSA versus FSA: Which One Wins?

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My son loves the Who Would Win books, so that’s the theme for this article, but with a bit of an HR spin. That’s right, a battle in HR. Well, a battle of benefits, that is.

We will look at Health Savings Accounts, known as HSAs, and Flexible Spending Accounts, known as FSAs. They are both great benefits to offer employees, but when it comes to choosing between an HSA and an FSA — which one is better? 


Pros and Cons of Flexible Spending Accounts

Let’s start with Flexible Spending Accounts (FSA).  The FSA has been around since 1978 when a tax reform act was passed to allow individuals to put pre-tax money aside for out-of-pocket medical expenses.  An FSA is a great tool to allow you to save money each paycheck to use for out-of-pocket medical, dental, and vision expenses.  If you know you have a large expense every year, instead of paying that out of pocket, you can save up throughout the year.  


FSA Benefits

The main benefit of an FSA account is that the money is taken from your paycheck tax-free. This means, that the deduction is made before any taxes are calculated, dropping your taxable income.

This year (2023), the maximum contribution allowed is $3050 for the year.  So, let’s say you have to have knee surgery this year.  You will have to pay your $1500 deductible plus $500 in co-pays for prescriptions and follow-up visits.  This will cost you $2,000.  If you plan to enroll in a flexible spending account, you can put $2,000 away pre-tax, saving you approximately $400 a year (assuming a 22% tax bracket).  If you were to use after-tax money to pay for your surgery, you’re going to pay tax on that money.  That’s where the cost savings come from.


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Additionally, one of my favorite benefits of the flexible spending account is that you can use the money before you contribute the whole thing. 

For example, let’s say you have a planned knee surgery in March.  You elect the $2,000 during annual enrollment and contribute via your paycheck in Jan, February and the first week in March.  You don’t have enough money saved up to pay for the surgery, but they will allow you to use the amount you initially elected.  It’s wonderful for those unplanned things that come up too!  Most FSAs also give you a runout period, meaning you can spend the money 3 months after your plan year ends, giving you more time to use it up.


FSA Cons

Now, here’s where the FSA falls short.  It’s “use it or lose it” rule means you have to really think about how much money you contribute.  If you elect the full $3050 for the plan year but only use $1500, you will lose the rest of the money.  You can use the money at the end of the year for glasses, prescriptions, and some over-the-counter medicine.  My favorite place to shop is The FSA Store.  Here you can use your FSA account to purchase approved items. It comes in handy when you have to use it all by the end of the year.


Pros and Cons of HSAs

Next in the ring is the Health Savings Account (HSA).  This heavyweight packs a punch!  The HSA allows you to put money aside for out-of-pocket medical, dental, and vision expenses.  It’s very similar to an FSA.  The HSA was established in 2003 as an answer to the use it or lose it challenges with the FSA.  


HSA Benefits

HSAs allow you to contribute pretax dollars to a savings account.  The account is owned by you and if you leave the company you work with, you can take it with you.  It also grows every year, and at a certain dollar amount, you can invest your dollars to make a better return for you.  It’s a savings account to cover you when you have out-of-pocket medical, dental, and vision expenses.  


Similarly to the FSA, the HSA has a maximum annual contribution.  In 2023, the limit is $3,650 for individuals or $7,300 for families.  This allows you to put aside more money each year and if you don’t spend it, it’s ok because it’s just accruing interest. You can also change your contributions throughout the year as long as you stick to the minimums.  This gives you much more flexibility as your circumstances change throughout the year.


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HSA Cons

The downside to an HSA?  There aren’t that many.  First, you have to have a high-deductible medical plan offered by your employer with a minimum deductible of $1,500 for individuals and  $3,000 for families.  That’s not atypical for employer-sponsored plans, but if these minimums are not met, you wouldn’t be eligible.  You also need to have the money saved up before you use it.  So, unlike the FSA where you can spend the full amount The other downside is that the plans are run by banks, so there are fees involved. Be sure to talk with your HR Representative about what fees you could incur.  


The Winner is…The HSA (Most of the Time)

It’s a close match, but the HSA offers you a larger tax shelter with the opportunity to save for the future whereas the FSA allows you to use the money you’ve elected before you’ve saved for it.  For long-term planning and savings, the HSA is the clear winner. 

However, if you have an immediate need, like a planned surgery or prescriptions, the FSA might be the right fit for you. Just like all benefit offerings, you need to weigh the pros and cons of each and find the winner that works best for you.