For many employees, your open enrollment has begun (or is about to start) and you must decide on which employer-provided benefits to enroll in for next year.
Perhaps, your employer offers a Health Savings Account (HSA) or a Flexible Spending Arrangement (FSA), but you aren’t sure which one is the best option. Let’s look at the definition of both and the differences between the two types of accounts.
What are HSAs and FSAs?
HSAs and FSAs are plans that allow tax-free savings for qualified medical expenses, including deductibles, copayments, coinsurance, prescription costs, and healthcare-related products and services.
What are the differences between HSAs and FSAs?
HSAs and FSAs have many differences, but eligibility requirements, annual contribution limits, and rollover options are the most notable. Refer to the table below for the highlights (important note: all data below is for 2018).
|Health Saving Account (HSA)||Flexible Spending Arrangement (FSA)|
|Eligibility Requirements|| + Must have a high-deductible health plan (HDHP)
that is your only health coverage
+ Deductible must be $1,350 or more for an individual
or $2,700 or more for a family
| Available only through an employer;
no additional eligibility requirements
Annual Contribution Limit
(Both Employee and Employer Contributions)
*annual catch-up contribution amount of $1,000
|Changes to Contributions||Any time throughout the year||Annually or with change in employment or family status|
|Rollover/Grace Period||Unused balances roll over into the next year||Use it or lose it (with two exceptions):
The plan will allow either a $500 carryover – OR – a 2.5-month grace period to spend leftover funds
|Account Ownership||Owned by employee||Owned by employer|
|Investment Options||Because this account is employee-owned, the employee
can choose how the funds are invested (i.e. money market funds, mutual funds, etc.)
|Because this account is employer-owned,|
you cannot control these funds
|Employer Connection||You can keep your HSA, if you change jobs||You will lose your FSA, if you change jobs;
the exception is eligibility for FSA continuation through COBRA
Can I enroll in both a HSA and a FSA?
Unfortunately, no, you cannot unless your employer provides a “Limited Purpose” FSA to be used only for vision care and dental expenses.
Why enroll in one of these accounts?
Not only can you use either plan to cover your medical expenses, such as co-payments for doctor visits, prescription medicines, your deductible, or coinsurance, but you can also use them for some over-the-counter (OTC) products. It’s important to note that some OTC products – like pain relievers, allergy medicine, and infant formula — require a doctor’s prescription or a Letter of Medical Necessity. But, do not fret, you can purchase many other items without a doctor’s note – sunscreen, contact lens solution, lip balm and first aid kits – to name a few. Go to IRS Publication 502 to find eligible items.
In addition to OTC products, several services are also eligible for reimbursement. As you may guess, most medical treatments are covered, but some services might surprise you. Birthing classes, transportation costs to receive medical care, and even tutoring may be reimbursable; just double check with your plan provider to find out if that particular service requires a Letter of Medical Necessity.
Finally, one little-known fact is that you can use your HSA to pay your long-term care insurance, COBRA, and Medicare premiums, which could provide a huge benefit during retirement.
Which one should I choose?
Many factors will impact your decision. If it’s a high-deductible health plan, you’ll probably want to use an HSA, so that you can contribute the maximum amount each year and roll over those contributions from year to year. If it’s not a high-deductible health plan, take a look at your average annual medical expenses (don’t forget the sunscreen!) and sign up to contribute that amount (up to $2,600 for 2018) to an FSA. Make sure to monitor your account, because you don’t want to end up buying 40 bottles of Coppertone just so you don’t forfeit your contributions!
If you have any questions about your benefits renewal, don’t hesitate to contact your TrueWealth Advisor.
Miller, Stephen. “IRS Sets 2018 HSA Contribution Limits.” SHRM, 5 May 2017, www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-sets-2018-hsa-contribution-limits.aspx.
Stover, Richard, and Andrew Eisner. “Health FSA Contribution Limit Projected to Remain at $2,600 in 2018.” Conduent, Knowledge Resource Center of Conduent Human Resource Services, 23 Aug. 2017, analysis.hrservices.conduent.com/2017/08/23/health-fsa-contribution-limit-projected-to-remain-at-2600-in-2018/.
Amy Hollibaugh is a Financial Planner at TrueWeatlh, LLC, a wealth management firm located in Atlanta, GA. She brings over 12 years of industry experience to her role. She can be reached at firstname.lastname@example.org or 404.487.0496.
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