Health Savinᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚgs vs. Flexible Spendiꦑng Account: An Overview

Health savings plans (HSAs) and flexible spending accounts (FSAs) provide two useful options to save money towards your medical expenses while reducing your tax bill. Which account should you participate in to provide the most benefits for you and your family? HSAs allow you to invest your balance and carry it over each year, while FSAs are a use-it-or-lose-it option. Let's compare the features of these two popular plans in more detail.

Tackling Rising Health Care Costs

Health care costs make up a huge chunk of most family budgets. One reason: prices for services and health insurance premiums rise every year. United States 澳洲幸运5官方开奖结果体彩网:spending on health care per capita has increased dramatically in the last five decades, based on analysis from nonprofit health care research organization KFF. In 1970, health care spending per person was $353. In 2022, it was $13,493. Translated into 2022 dollars, the increase was about seven-fold, from $2,072 In 1970 to $13,493 in 2022.

As prices rose, the options for individuals to allocate their health care dollars also expanded. Beginning in the 1960s, 澳洲幸运5官方开奖结果体彩网:h🔜ealth reimbursement accounts (HRAs) were created by employers to help offset rising health care costs as an employee benefit. (HRAs were officially recognized by IRS in 2002.) 澳洲幸运5官方开奖结果体彩网:Flexible spending accounts (FSAs) for medical expenses, part of a major piece of tax legislation in 1978, were intended to help combat some of the drawbacks of the HRA, namely that employees could not contribute to them.

These arrangements were quickly added to a range of pretax employee benefits choices. These plans became known as 澳洲幸运5官方开奖结果体彩网:cafeteria plans because of their similarity to choosing different menu items in a cafeteria. 澳洲幸运5官方开奖结果体彩网:Health savings accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses.

The primary differences between HSAs and FSAs are that an FSA is employer-owned and less flexible; withdrawals are not allowed; and contributions cannot be rolled over to the next year. An HSA is controlled by the individual and is more flexible; withdrawals are allowed with a penalty (unless you are age 65 and up); and contributions can be rolled over to the next year.

When choosing benefits during 澳洲幸运5官方开奖结果体彩网:open enrollment, it pays to examine the choices carefully. Depending on your situation, a high-deductible health plan paired with an HSA might work well—or it might be too costly. Run the numbers using an online calculator. If you are able to take advantage of a health reimbursement account, an FSA or some of the other choices may be a way to 澳洲幸运5官方开奖结果体彩网:reduce your tax burden.

Health Savings Account (HSA)

An HSA is offered by employers in conjunction with a 澳洲幸运5官方开奖结果体彩网:high-deductible health plan (HDHP). Self-employed people who have high-deductible plans can also set up HSA accounts.

The employer or self-employed individual deposits all or a portion of their 澳洲幸运5官方开奖结果体彩网:deductible into an HSA to cover costs until the deductible is met and the 澳洲幸运5官方开奖结果体彩网:health insurance policy takes over the financial burden. Anyone can contribute to your HSA, including family members, friends, and your employer.

Once the account is set up, an employee can contribute additional money to the HSA via payroll deduction from 澳洲幸运5官方开奖结果体彩网:gross income. The money contributed to an HSA account is made with 澳洲幸运5官方开奖结果体彩网:pretax dollars, which reduces the amount of income reported for tax purposes. Interest earnings on the money in the account is also tax-free.

Many HSAs provide you the option to invest your funds and earn additional money, allowing contributions to grow faster through compound interest. Once you reach age 65, you can basically treat your HSA like a retirement savings plan, as the 20% withdrawal penalty no longer applies after that age.

Flexible Spending Account (FSA)

An FSA is similar to an HSA, but there are a few key differences. For one, the employer—not the employee—owns the FSA. Secondly, self-employed individuals aren't eligible.

One of the biggest benefits of an FSA is that it can be set up as a Dependent Care FSA (DCFSA) to allow withdrawals for childcare expenses. It is also possible to have a separate, regular FSA to coverꦦ medical expenses depending on your company's plaꦑn.

Like the HSA, you can contribute to an FSA using your gross pay, making your contributions tax-free. As long as you use the funds to pay for qualified medical expenses, you probably won't 澳洲幸运5官方开奖结果体彩网:owe taxes on withdrawals.

HSA vs FSA: Key Differences

A withdrawal from an HSA can be used for a broad range of medical expenses such as eyeglasses, contacts, chiropractic care, and prescription drugs, as well as doctor visits and hospital stays. However, an FSA provides earlier access to your funds than an HSA does. HSA funds only accumulate as your make contributions, so you can only take out whatever you have contributed to date. On an FSA, once you select your annual contribution (such as $2,500), the full amount is available for use on the first day of the plan year.

The HSA is a 澳洲幸运5官方开奖结果体彩网:portable account that allows you to keep your money even if you switch jobs. To qualify for an HSA, you have to be enrolled in a high-deductible health plan. In most cases, you are not eligible if you have other health coverage or can be claimed as a dependent by someone else.

Aside from setting up your FSA as a DCFSA, which allows withdrawals for eligible childcare expenses, you can also have a separate, regular FSA to cover medical expenses depending on your company's plan.

Like the HSA, you can contribute to an FSA using your gross pay, making the contributions tax-free. As long as you use the funds to pay for qualified medical expenses, you probably won't 澳洲幸运5官方开奖结果体彩网:owe taxes on withdrawals.

The table below summarizes the differences and similarities between both health accounts:

Other FSA Considerations

Unlike an HSA, you have to declare how much you would like your employer to deduct from your gross pay to fund your FSA in each calendar year. Once that declaration is made, you generally can't change it.

If you declined the FSA during the open enrollment period, you'll likely have to wait until the next open enrollment.

Your declared FSA funds must be spent within the tax year, although a 澳洲幸运5官方开奖结果体彩网:grace period is sometimes granted. The money you contribute can be lost if you don't spend it all by the deadline.

You don't have to be covered under a health insurance policy to be eligible, However, FSA funds are not an adequate substitute for health insurance. You also can't use an FSA to pay your 澳洲幸运5官方开奖结果体彩网:health insurance premiums. If you can't afford both, it would be better to put those funds toward health insurance.

The Bottom Line

If you meet the eligibility requirements, an HSA is typically a better choice for most people because you can contribute a higher amount and any unused funds roll over to the following year. If you are enrolled in a high-deductible health pl🅺an that meets the rules of eligibility established by the IRS, you are free to enroll in an HSA through your employer or on your own.

Many companies offer both HSA and FSA plans. Under certain conditions, you may be able to sign up for both. In either case, establishing a medical savings plan can represent significant annual tax savings depending on your tax bracket. If you establish an FSA, just keep an eye on the account to make sure you don't let any accrued money expire at the end of the year.

The eligibility requirements, allowable contributions, and rules for medical▨ savings plans are established by the IRS. You can reference these details in .