What’s the difference between a Health Savings Account (HSA) and a Flexible Spending Account (FSA)?

This question actually came up this morning at a Networking Function I attended and most of the attendees were surprised with the answer.

For those of you that read my prior postings, you would know that a Health Savings Account is money that you can set aside “Pre Tax” to pay for medical expenses on a tax favored basis!

Sounds pretty good huh? You get to pay for Drugs, exams and hospitalization Pre Tax!

Here’s an example:

You have a $3000 Deductible on your Health Insurance Plan. If you pay for that with after tax funds and you’re in the 25% tax bracket, you would have had to make $4,000 before taxes, paid taxes of $1,000, and then used the remaining $3,000 to pay for your medical bills.

If you used a Health Savings Account, you would have set aside $3,000 Pre Tax and it would have all went toward your medical benefits. So, the other $1,000 you would have had to set aside originally, you would pay taxes on ($250) and you would have pocketed the remaining $750.

So, if you in the 25% Tax Bracket you would save roughly $250 per $1000 by using Tax Advantaged funds.

After looking at these numbers, you clearly make out much better using a Health Savings Account.

Then you may ask, “What’s a Flexible Spending Account?”

Well, simply put they are almost identical to Health Savings Accounts with one major drawback.

In a Flexible Spending Account you CAN NOT carry over remaining balances at the end of the year!

This is considered a use it or lose it benefit. This is why it becomes so difficult to use them. Insured’s don’t want to save too much, because if you don’t use it for health care by the end of the year, you lose the balance, but if you save too little you don’t maximize your benefit! This creates a major budgeting issue!

So, why would I use a Flexible Spending Account?

Health Savings Accounts MUST be paired with a High Deductible Health Insurance Plan. So, if you have a traditional plan a Flexible Spending Account is your only option.

So, in conclusion Health Savings Accounts have a better benefit (The balances carries over year after year) because there’s greater exposure that you have to meet a high deductible at some point.

Flexible Spending Accounts offer a similar benefit (Without the carry over) to people who have a traditional health insurance plan.

So what should I do?

If you have an Health Savings Account:
Try to save Pre Tax your Deductible every year. Its Pre Tax and forced savings, it’ll benefit you in the long run.

If you have an Flexible Spending Account on a Traditional Plan:
Look at how much you spent on medical expenses the year prior, and set only that amount aside for the up and coming year. This way you’ll still take advantage of the benefit without the threat of over contribution. You should also spend the remaining balance by the end of the year (ie. Buy prescriptions, checkups etc. before the year ends).

If you have any questions you can always reach me at 631-338-9917.

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