Ways an HSA is Better Than an FSA

A Health Savings Account Beats a Flexible Spending Arrangement in the Long Run

Wondering which is the smarter move, putting money into a Health Savings Account or putting it into a Flexible Spending Arrangement? Although you may be forced to choose one over the other because of eligibility rules, if you have the choice, an HSA offers several advantages over an FSA. Here are five of the biggest reasons an HSA is better than an FSA.

You Own Your HSA. Your Employer Owns Your FSA.

Image © Alex Mares Manton/Getty Images

Your Flexible Spending Arrangement is technically owned by your employer, not by you. When you contribute money to your FSA, you’re putting money into an account you don’t own. Granted, your employer uses the money to pay for your out-of-pocket medical expenses. However, there’s also a chance you can lose the money in your FSA.

If you leave your job and there’s money in your FSA, that money—the money that came from your paychecks—is forfeited to your employer. Learn more about this in “What Happens to My FSA When I Leave My Job?

You could even lose the money in your FSA if you don’t lose your job. At the end of each year, the unspent money remaining in your FSA is forfeited to your employer. Although your employer has the option to roll over up to $500 remaining in your FSA to your next year’s FSA, it’s not obligated to do so. If you have more than $500 remaining at the end of the year, the excess must be forfeited.

By contrast, since you own your HSA, you never forfeit the money in it. It’s all yours. You manage it. You decide how it’s spent. You call the shots.

You Can Invest the Money in Your HSA, but Not Your FSA.

Image © Photo Talk/Getty Images

When you put money into an FSA, the money sits there doing nothing until you either spend it on out-of-pocket medical expenses or forfeit it.

When you put money into an HSA, you can invest that money. The interest and earnings from your investments grow tax deferred like they do in a 401(k) or an IRA.

When you withdraw the earnings and use the money for a qualified medical expense, you don’t pay income taxes on it. It’s hard to beat an investment that’s tax-deductible when the money goes in, grows tax-deferred, and is tax-free when it’s withdrawn.

You Can Have an HSA Even Without a Job.

Image © Hero Images/Getty Images

Your FSA is linked to your job. You can’t start an FSA on your own. FSAs are part of an employee benefit plan.

Your HSA isn’t necessarily linked to your job. You can start an HSA even if you’re unemployed. While some employers help employees set up an HSA and some even contribute funds into employees’ HSAs, the HSA itself isn’t linked to the job. If you lose your job, the HSA and all of the funds in it—even the funds contributed by your employer—are yours to keep.

One caveat: to start or contribute to an HSA, you must have a qualified High Deductible Health Plan, or HDHP. If you don’t have an HDHP, you cannot open an HSA. If you open an HSA while you have an HDHP and then later lose your HDHP, you may keep your HSA and continue to take withdrawals. However, you can’t make any more contributions to your HSA until you’re covered under an HDHP again.

Lose Your Job? You Can Pay for COBRA With an HSA but Not an FSA.

Image © David Sacks/Getty Images

COBRA continuation health insurance premiums count as an eligible medical expense for your HSA. If you lose your job and you decide to keep your job-based health insurance plan through COBRA, you can take money from your HSA to pay the monthly premiums. You won’t pay income taxes or penalties on funds withdrawn from your HSA for this purpose.

However, you may not use the funds in your FSA to pay health insurance premiums, even for COBRA.

Your HSA Is Another Way to Save for Retirement.

Image © Rubberball/Mike Kemp/Getty Images

An HSA can be used as a vehicle to stash away tax-deferred savings for retirement, yet still have the funds immediately available if a medical need arises.

While these funds are technically earmarked for unreimbursed medical expenses, once you turn 65, you may take withdrawals from your HSA for any reason without paying a penalty. If you use HSA funds for eligible medical expenses, you don’t pay income taxes on withdrawals. If you withdraw funds for non-medical expenses after you're 65, you’ll pay income taxes on the funds, but no penalties.

Once you turn 65, you may use your HSA funds to pay Medicare premiums, however you cannot pay for Medicare supplemental coverage like Medigap with HSA funds.

Unlike an IRA, there is (so far) no requirement that you take a minimum distribution each year from your HSA. You can leave the money in there, growing tax deferred, for as long as you like. And yes, it can go to your designated beneficiary upon your death.


Continue Reading