The Better Budgeting Podcast

HSA or FSA: Which Should I Chose?

• Danielle Reese • Season 3 • Episode 13

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Danielle is a money coach helping women and couples who have been trying to figure out their finances FINALLY create a clear plan so they don’t have to worry about waiting to refill their bank account the next payday.

She is the founder of The Financial Freedom Society on Facebook and her signature money coaching program, The Better Budgeting Playbook. You can sign up for her newsletter by clicking here.

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Speaker 1:

Hello and welcome to the Better Budgeting Podcast. I'm your host, danielle Reese. I'm a money coach and the founder of the Better Budgeting Playbook, and this is my one-on-one coaching program for women and couples who have been trying to figure out their finances, finally create a clear plan so they don't have to worry about waiting on payday anymore. I became a money coach in 2020 after paying off over $60,000 in debt, rekindling my marriage, becoming financially free and wanting others to experience the same. If you'd like to work with me, you can check out the link in the show notes there. Also, we have the Financial Freedom Society on Facebook. It's a free Facebook community focusing on debt payoff, saving strategies, budgeting and money mindset. You can find the link to that community in the show notes as well. Hey y'all, welcome back. Today we're going to be digesting HSAs and FSAs.

Speaker 1:

I just opened my open enrollment with my husband's employer and that stuff is hella expensive and I actually had a client that reached out to me and asked you know, what should I do? What are these? What's an HSA? What's an FSA? What's a dependent care FSA? And I was like podcast episode. Here we go, so let's get into it. Before we actually get into it. Let's discuss the fact that I had no idea that I could just go out and search for health insurance. You would think that I would know such a thing, but I was like, no, you have to get it through your employer. It's always cheaper than that. You shouldn't be buying it elsewhere. And I just went down this rabbit hole today after I looked at the increases that we would be paying for health insurance and, mind you like, we're a very healthy family, we barely go to the doctor. I mean, we have these one-off surgeries or whatever here and there, but we have very minimal health expenses and the amount of money that I have shelled out this month and just for like coverage right, like the premiums, just for coverage and then the amount of money that I've paid on top of that, because health insurance technically doesn't even kick in until we pay out of pocket, so much it's called a deductible I could just throw up, oh my gosh. So then I just go out down this rabbit hole today of like researching different types of health insurances and I will tell you I've got a meeting in a couple weeks with a health insurance broker, so maybe that'll turn into a podcast episode of just understanding like how that all works, but right now I have a meeting set and we will figure this out, because there is no way that I'm going to be paying way more for less coverage through my husband's insurance, if I can help it.

Speaker 1:

So, anyway, what is an HSA and what is an FSA? So let's start with an HSA. Okay, an HSA is an employee owned health savings account. Okay, you can only have these if you participate in a high deductible health plan, hdhp. You probably see that when you're looking at your open enrollment. This is really, really important. You cannot get this unless you are paying a high deductible plan. Pre-tax dollars go in there and you can deposit this via your paycheck, and it is only for qualified medical expenses will also contribute to this account. So when I was working full-time for a company, they actually did this, so they matched it by a certain percent, which was freaking awesome. So every dollar that I was putting in there, they put a percent in there as well, and it's like free money.

Speaker 1:

What's nice about a HSA is that this belongs to you. It will always stay with you, no matter if you leave the company and you go to a new company. This is your money. What you put in there is yours forever and, as you contribute money throughout the year and you're using some of it, you actually have the opportunity to roll money over year over year. That's really important to note, because that's very different from an FSA. Hsas can also turn into retirement accounts for medical expenses. So you think about an IRA or even a 401k that you have with your employer. You put money in there and it grows right HSA. Once you get it to a certain threshold, you can start investing that money so that it grows. But anything that is invested is now all need to be used for medical expenses. You'll see people use this as an investment account for their medical expenses in their older years.

Speaker 1:

Now an FSA is called a flexible spend account and we've got two options for these. Typically, you have a dependent care FSA and then you have a health savings FSA. What's great about these are they follow the same guidelines but they can be spent on different things. So a health savings account is a flexible account that employees contribute to pre-tax dollars again and you can only use them on medical expenses or daycare expenses, and these are owned by your employers. These are not owned by anybody else but your employers one thing that is very different than the HSA is that once you put money in there, it is a lose it and use it situation. If you are not going to be using it by the end of the year, it the account wipes clean at the end of the year. So if you've got a thousand dollars in there, you better pull that out.

Speaker 1:

Um, if not, it gets absorbed to the employer. It doesn't go to the government, it goes to the employer which is something new that I learned and they use it for tax advantages as well Some different things that you can use it as your company, but it's regulated on exactly how you can use it. So I thought that was just really interesting. So if you really don't like your employer, just know to pull all that money out. You do not have to participate in a high deductible health plan to get this. So if you can have a cheap option of insurance it's not a high deductible you can go ahead and put this money into an FSA. Also, because this is owned by the employer. If you leave your company, the employer gets it. You don't get to take it with you. That's a no. So that's kind of like a big risky thing If you feel like you're going to be leaving companies within that enrollment year, it might not be the best option for you at this time to contribute to an FSA.

Speaker 1:

So I gave you a couple differences individually and told you what those accounts are for. Now let's kind of go line by line and discussing what those big differences are. So contribution limits for 2025. An FSA is $3,300. For an HSA, you have the option to contribute as an individual or as a family plan. So an individual plan, the limit is $4,300. For the family plan, it is $8,850. Big differences between account ownership An HSA, you own it.

Speaker 1:

You carry the funds year over year and to new jobs. With your FSA, the employer owns it and any unused funds are going to revert back to them. Eligibility between the two differ as well. Employees participating in a qualifying high deductible health plan can get an HSA. If you are an employee and you have the opportunity to get an FSA, you can get them, whether you're in a high deductible health plan or not.

Speaker 1:

Now let's talk about eligible expenses, because some of these you're going to be like what, what, why? I can't believe that I could use my dollars for this. So I found a list of all qualifying expenses for an HSA and for an FSA. So an HSA? Here's some randoms Antibacterial hand sanitizer, hearing aids, motorized wheelchair, eye exams, orthodontics, allergy medicines, ibuprofen, baby sunscreen, blood donation, breast pump, band-aids, bandage clips, bandages, cold medicine, chest rub, compression socks Like you understand, it's not just prescription medications or just medical bills. Like there's a lot of stuff in here that you can use these dollars for. Some that are included with the FSA is AA meeting, transportation, arm slings, eye surgery, x-rays, ibuprofen again, crutches, face masks a lot of these are repeating, so like that is a wide range of things that you can buy with these dollars.

Speaker 1:

Now let's talk about access to funds. So in hsa, they're gonna give you probably a debit card or maybe a checkbook for this account and you just go and you purchase those things that you need and even if you don't use that card or that checkbook, you can even get yourself reimbursed by just submitting a receipt and just going and pulling the money out and transferring it into your bank account. Now for an FSA, it's a little bit more time consuming. You have to get a written statement from the third party validating that the expenses have been made in a statement claiming that the expense is not covered by any other health care plan, and then they go ahead and reimburse you. How lovely.

Speaker 1:

Let's talk about access to funds. So for an FSA, if you you say, hey, I want to contribute all $3,300, you're going to take that out of my paycheck every single time I get paid, they'll break it down into those amounts and they are going to drop $3,300 into your FSA account at the very beginning of your open enrollment. So if that's the beginning of the year, that's when it happens, and then all year long you would use those funds. And HSA is just a bit different. You have to continually contribute throughout the year. So if you are only contributing $100 a paycheck, well that first paycheck of the enrollment time is $100 in the HSA account, the next time is $200. And if you use any of it, it balance goes down.

Speaker 1:

So if you know that you have an upcoming medical expense near the beginning of the enrollment time, then I would say HSA is probably not the best option. Maybe an FSA is great, because then you can go ahead and pay it all up front, get the bill out of the way. You don't have to do a payment plan of any sort. But there's other factors, right that we're discussing here and figuring out. Is it the best option?

Speaker 1:

Another difference between an FSA account and an HSA is the option to change your contribution amount. An HSA you can do that all year round. You can change it every other week if you want it. It doesn't matter as long as it doesn't exceed the maximum set by the IRS, which is that $4,000 some dollars and $8,000 some dollars for family. Now, with an FSA, though, it's a set it and forget it. You will not be changing it. So you got to do some math here. You need to go ahead and look at your medical expenses for the year. You need to add in a buffer for all of those oddball expenses like ibuprofen and band-aids and things like that you're going to buy throughout the year, and get a really, really close estimate on how much you're going to be spending, because again, it's a use it and lose it kind of situation. So those are the comparisons.

Speaker 1:

But let's talk about dependent care FSA. This is kind of like a subset of an FSA. It's usually offered. If an FSA is also offered, it's a complete, separate account. So you have FSA, dependent care, fsa and then HSA. The FSAs are very similar. They ride the same guidelines, but the eligible expenses for a dependent care are specific for taking care of family. So if you have a spouse that cannot take care of themselves legally or a child, this is a great place to put money aside for these expenses. This is great place to put money aside for these expenses. So, adult daycare facilities, application fees for daycares. Babysitting that is only work related, like not date night babysitting, but if you get a babysitter, come into the house and you pay them because you have to go to work. This applies Extended care like before and after school hour stuff, late pickup fees for daycare, licensed nursery schools, preschool qualified child centers, summer camps for children under the age of 13. All of this can be put into a dependent care FSA.

Speaker 1:

Now, just like I was talking about with an FSA and estimating your expenses for your medical, for the dependent care, you got to do the same thing. So if you know that you pay $400 a month for after school care and that ends in May, you know from June through August you don't have that expense, well, you're going to do $400 a month for January through May and then you're going to do $400 a month for September through May and then you're going to do $400 a month for September through December, because that's how much you're going to be spending, and then you're going to add that number together. You know, hey, I need this much for aftercare school and then maybe you're going to send your child to summer camp. Great, I'm going to add in $200 a week for summer camp and we're going to add that expense for June dollars a week for summer camp and we're gonna add that expense for June, july, august and we're gonna add that to the number. So you really have to get strategic about how much you're paying for these daycares or these summer camps or anything like. That's tuition stuff, because it is a use it or lose it situation. This one is a little bit easier to kind of navigate because you know how much you pay in daycare. You know how much you're going to be paying for summer camp, like that's pretty much easy to figure out.

Speaker 1:

Now let's talk about payroll deductions for these. Okay, let's say that you sign up for a dependent care FSA because you've got a child in daycare after school program. And let's say you sign up for an HSA health savings account and together you've estimated all your costs and everything that you need and that number comes out to be $350 a paycheck to cover all of these expenses. Now I've walked clients through this scenario and they feel like, oh my gosh, my paycheck is going to be reduced $350. Like what a gut punch. But here's the thing that money is still yours. What's happening is you're taking your money and you're saying, hey, before you give me this $350, I want you to go place it in these accounts, specifically because I'm not going to get taxed on those dollars when they sit to those accounts.

Speaker 1:

First, that's really, really important to note that that $350, girlfriend, you are paying anyway. Right now. It's just coming out of your paychecks, which means that $350 is getting taxed. You're paying taxes on that $350. So when you go and you put it into any of these accounts an FSA or an HSA you are not paying taxes on that money. Girly, that's awesome. You're saving money. Also, it helps at the tax time too, because when you, let's say, you have a number of $100,000 for your household income $100,000, they will take how much you've contributed into these accounts and deduct it and that is your new taxable income FSA, dependent care FSA, I should say, because you can't have both, but you have a dependent care, fsa, and you've got an HSA and you spent $5,000. They're going to take your income and they're going to say, all right, $100,000 minus $5,000 because they've contributed into tax-free accounts. You're only going to get taxed on $95,000, which is awesome. Like we're saving money over, you know, paying these bills that you're already paying. By the way, you're already paying this stuff and it's coming into your paycheck. Get some free freaking money, girly, and go put them in these accounts. Yes, you're going to be deducted the $350. It's going to feel like a gut punch but, like I said, it's just going and getting into a separate account. First You're going to pull that money and then you're going to go pay those bills anyway, so everything will be fine.

Speaker 1:

Now there are a ton of other employee benefits that you're probably seeing when you're going through your open enrollment. Right now, you've got short-term disability, long-term disability, vision, dental and critical illness. There's just so much out there. What I would recommend you do is go to your HR. Your HR can't tell you what to do, but your HR can do what I've just done and educate you on what these things are. If you don't know, ask questions. Ask a lot of questions. Ask them what's the benefit of taking an HSA? What's the benefit of doing a higher premium health insurance and less deductible? Ask them these questions because they are there to educate you. Again, they can't tell you what to do, but they can say here are all your options. Here's kind of like a pro and con list that we just kind of work together here on this podcast.

Speaker 1:

Please, please, please, take advantage of a lot of these different programs. When I was working, we actually had a benefit like a pregnancy benefit, where they sent me like a $50 Target gift card just for being pregnant, but I had to apply and I wouldn't have known it unless I'd read the benefits package. Understand what is short-term disability. Do you even have it? Is it supplied by the employer? Is it something you have to pay for? What is long-term disability? Are there any wellness packages, including like a gym membership? Are there any financial packages? I know financial coaches that go into employers and they actually offer this as a financial wellness program. Ask about that. Is there anything? And if they don't have one, you know a girl to hook you up, because I definitely will be doing that in 2025 is helping companies with employee retention to help them stay and learn how to manage their money. So that is something that you need to ask about.

Speaker 1:

Get well familiar with all of your benefits, because that is part of your entire compensation package. People don't realize that the number that just comes into your pocket is not your compensation. It's the additional health insurance that your employer pays, it's the 401k matches, it is the PTO, it's the personal days, it's the sick days, it's all of it combined and you'd be surprised, actually, how much it costs to have an employee on board. So what I want you to do is go through your open enrollment packages, look at everything and then go ask questions with your HR, get familiar on all of the things and, if you help, let me know as well. I will help educate you as much as possible for all of the information that you have to unpack. So, with that, thank you so much for listening to this week's podcast, and we'll talk again soon, see ya.