FSA vs HSA: What's the Difference and How to Choose the Right Account? | Ep. 21

Deciding between an FSA and an HSA can feel like a financial gamble, especially with the 'use it or lose it' rule hanging over an FSA. 

Melody Mulaik breaks down the Flexible Spending Account (FSA) and the Health Savings Account (HSA). Learn the critical differences in funding, ownership, portability, and rollover rules so you can confidently set aside pre-tax dollars to cover your family’s qualified medical expenses. 

Whether you're in a high-deductible plan or planning for predictable healthcare needs, this episode will help you invest wisely and lower your taxable income.

Featured Topics:

• Understand the fundamental difference between an FSA (Flexible Spending Account) and an HSA (Health Savings Account), and why one is a "use it or lose it" scenario while the other rolls over.
• Learn which account is tied to your employer and must be left behind if you change jobs (FSA), and which one is owned by you and is fully portable (HSA).
• Find out how both accounts offer pre-tax contributions, but only an FSA might allow you to spend ahead before you've contributed the money.

What You’ll Hear:

• [0:00] FSA vs. HSA, what’s the difference?
• [0:36] Defining FSA (Flexible Spending Account) vs. HSA (Health Savings Account)
• [0:45] The critical distinction: Spending vs. Savings
• [0:55] FSA: Employer-tied, set contributions, and portability issues
• [1:15] HSA: Tied to high-deductible plans and portability
• [1:35] The one similarity: Both are pre-tax contributions
• [2:00] FSA’s 'Use It or Lose It' vs. HSA’s Rollover
• [2:40] Spending ahead: How an FSA can function like a credit
• [3:30] Tax implications of withdrawing non-medical HSA funds
• [4:15] Choosing the right plan for high deductibles
• [4:50] Final thoughts on lowering taxable income and managing medical expenses

Want to Ask Melody? Visit: https://melodymulaik.com/ASK Don’t forget to subscribe so you won’t miss an episode. If you've ever stared at a Flexible Spending Account (FSA) or Health Savings Account (HSA) option and had no idea which one saves you money or causes you to lose it, this episode is a must-listen.

Transcript

Melody: 0:13

Hello everybody and welcome to this episode of Take Care. My name is Melody Mulaik, and it is always my pleasure to answer your questions as we navigate the healthcare system together. So, this week's question come from Samuel and he asks, what is the difference between an FSA and an HSA? That's a really great question. Regardless of the time of year, it is, whether it's the end of year and you're trying to determine your benefits for the coming year or you've changed jobs or you're just looking at reevaluating, how might you take advantage of those particular offerings? Well, the difference between an FSA and an HSA, there are very much some distinct differences. So, let's start with an F sA is a flexible spending account by definition, where an HSA is a health savings account. And I think focusing on those words of spending versus savings is one of the important distinctions right outta the gate. So, FSA is generally going to be just through your employer. They're going to determine ultimately how much you can contribute and they might even potentially contribute not always. And it's usually a set amount of the maximum amount you can contribute into that. FSA on annual basis. And HSA typically goes along with a high deductible plan. And it's not necessarily tied to an employer, so you could get an HSA account on your own, or you could potentially do that through your employer. Now, there are some similarities to these as well. Both of these H-S-A-F-S-A are pre-tax things, meaning that when you contribute to one of these types of account. That is considered to be a pretax contribution, and that reduces your total taxable amount, related to your salary for a given year for that. Now, with an HSA, that is typically going to be managed by you because when you leave your current position, if you do, you can take an HSA with you. With an FSA, that's not the case. An FSA is going to. Stay with that specific employer. It's typically owned by that employer. So, if you leave your position, you're going to be leaving behind, potentially any money associated with it. Now, with an FSA, it is typically a use it or lose it scenario. So, whatever you contribute in a given year, you need to use that towards qualified medical spend. Or you can't do anything with it. So, it's kind of a little bit of a balancing game to determine how much do you contribute because you do want to make sure that you use it all in that given year. With an HSA as an example, while there is a maximum amount you can contribute in a given year, usually it's an amount for an individual and then amount for the family. You don't have to use it all that year, and you can roll over that particular amount. So, again, important distinction, FSA has to be spent that year. HSA can be rolled over. Another thing that's different between the two is most FSAs, and again, not all, so you'd have to look at your individual plan that you might be eligible for, is a lot of times FSAs almost function a little bit like credit. Where even in January or February of a given year, you could go ahead and spend more than you've actually contributed into your FSA. As long as you make sure you contribute it during the course of that year, you're allowed to actually spend a little bit ahead. That's not true with an HSA. With an HSA, you must have those monies contributed already in order to spend. So, again, with FSA, you're a little bit ahead. HSA, not necessarily the case with that. But again, both of those have tax free contributions where whatever you're putting into those plans are considered to be pre-tax. Now, with that FSA, again, it's use it or lose it. Can only be used for healthcare, payments, or it's not even just payments, it's anything that meets qualifications for it. You may even notice sometimes when you're at a drug store or even at a grocery store, there'll be notations of things that meet the qualification of an FSA or an HSA. So, if you're buying over the counter medications or other types of things related to medical. You can use that and submit that to have that covered under that FSA or HSA. With HSAs, ultimately, let's say you've contributed a lot of money and you decide, you know what? I'm not going to use that specifically for qualified medical expenses. I'm actually going to pull that money back out. You may have a tax implication associated with that. So, HSAs, you can contribute more money. If you don't use it specifically for those qualified medical expenses, you may have a tax issue for that on the backside of it. So, that is something that's always good to talk to an accountant about. But if you're in a high deductible plan and you want to make sure that you're setting money aside to meet that high deductible, you want to look at an HSA program'cause again, you can contribute higher dollar amounts. FSA is going to be something, you know, you could use it for a high deductible plan as well, but typically it's going to be your other plans are a little bit lower. You're going to want to set some money aside so that as you're going to meet that 1000, 2000,$3,000 deductible, you've set money aside for that. But again, choose wisely because you want to make sure whatever money you're pulling out in a given year, you're going to be spending it. Because if you don't, then you're going to be losing that at the end of the year. So, that's really the main distinctions between an FSA and an HSA. I do encourage people to look at those, look at how you and your family, consume healthcare and if you know that you're going to be meeting your deductible of a thousand or 2000, 3000, et cetera. Planning ahead and putting money aside an FSA is a good investment. It lowers your taxable income, it makes it a little bit easier to manage it, so you're not always having to come out of pocket every time you have that medical expense as you're going to meet your deductible. So, thanks for submitting that question. And if you have a question that you would like for me to answer on the Take Care podcast, please go to the website at takecarepod.com. Put your question in and I would love to answer it. In the meantime, take care.