HSA, FSA, What’s the Difference?

Q. My company offers both an FSA and an HSA.  I can’t see that there are any differences.  Help!

A. Yet another in the long list of acronyms meant (I’m sure of this) to confuse employees.  The differences begin with the names.  The spelled out versions are “Flexible Spending Account” and “Health Savings Account.”  There are two huge differences between these plans that I will discuss here to get you started.

I’ve never been a fan of the Flexible Spending Account (FSA) arrangement.  You get to choose how much in pre-tax dollars you will put into a plan to pay for your medical bills.  This plan is held in trust by your employer.  The key is, if you don’t use it, you lose it.  You must spend all dollars in the plan by year-end in order to not lose the money you contributed to the plan.  How many of us can guess the amount of medical expenses we will incur during a year?  Not me!  While is certainly helps to have pre-tax contributions, it is like a sports car without wheels in my opinion.

Health Savings Accounts (HSAs) involve a high-deductible health insurance plan and a savings plan.  The savings plan is pre-tax just like the FSA except that is does not go away.  It is also portable and can be used until it is drained.  If you do not use it all in a given year, you carry the balance over through subsequent years.  Many plans even pay you interest on the balance you keep in the plan. In my opinion, this is a better option if you employer offers it.

I have discussed HSAs before on this blog.  There are some risks associated with it relating to the higher deductibles required.  Read the linked article or search the IRS website for further information.

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