FSA OR HSA? WHICH WILL SAVE YOU MORE MONEY THIS OPEN SEASON?

Here’s a brief overview and comparison of the HCFSA (Health Care Flexible Spending Account) and HSA (Health Savings Account). Both of these plans can help you save much on taxes.

What are the benefits of a HCFSA or HSA?

If you spend any money on health/medical-related products and services such as Doctor’s co-pays, chiropractic, dental, vision, prescriptions, etc, you could pay for those products and services with pre-tax dollars, thus reducing your taxable income.

Surprisingly, many people don’t fully use this benefit. They buy their contact lenses or lens solution with a post-tax dollar. They pay their insurance deductible or co-pay with post-tax dollars. These types of expenses can be paid for with pre-tax dollars. Let’s illustrate what that means.

Suppose you earn $100,000.  You will have to pay taxes on those $100,000.  However, if you set aside $2,500 in an FSA or HSA, your taxable income will drop from $100k to $97,500.  How much money could that save you in taxes?  If you add together federal (28 percent), state (roughly 7 percent), Social Security (6.2 percent) and Medicare tax savings (1.45 percent), the tax savings will be over $1,000!

What is the difference between HCFSA and HSA?

Up to here, we described the benefits shared by the two types of accounts, namely they both save you in taxes.  How do these accounts differ?

• Contribution limit: HCFSA has a maximum contribution limit of $2,600. HSA limits are higher;  $3,400 for an individual, $6,750 for family. This translates into more tax savings.
• “Catch-up” contributions: HCFSA does not allow “catch up” contributions. HSA allows a $1,000 for those age 55+. (“Catch up” is available even for those who have been maxing-out their HSA contributions their whole life).
• Use or lose: HCFSA money is subject to “use or lose.” This means the HCFSA money is only available to pay for eligible medical expenses incurred by December 31^st. HCFSA money will not be available for expenses incurred after December 31^st, which means that whatever is left over is unusable, thus lost.  (This may sound scary but it doesn’t have to be for four reasons):

1.  You can limit your contribution to FSA to equal the medical/health expenses that you expect you’ll incur over the year. This way, you won’t have any funds unused.
2. HCFSA now allows a $500 carryover.
3. Even if you “lose” to the HCFSA, you will have saved in taxes, thus offsetting the loss. If you still have a balance towards the end of the year, just buy yourself a new pair of glasses or schedule a visit to a chiropractor or masseuse.
4. With HSA there is no “use or lose.”  If you didn’t use your balance by year’s end, it rolls over into the next year.

• Contributions on top of carryover funds: HCFSA allows a $500 carryover, as mentioned above. However, that reduces the amount you can contribute in the HCFSA the subsequent year. HSA does not have this limitation. You can make a full HSA contribution even if you carried-over your full prior-years contributions.
• Growth of account balance: HCFSA does not provide a way to grow your account balance. HSA, on the other hand, provides ways to grow your account balance, either through an account interest rate or by providing investment capabilities to the account. This feature, along with the previous two features, allows you to grow your HSA substantially so it can provide tax-free dollars to you in the future, for a time when your health-related expenses may rise (i.e. retirement).  This is something even your TSP or IRA cannot do. (Oh, and by the way, there are no income limitations to prevent you from participating in HSA, unlike IRAs).
• Can access funds in retirement: HCFSA funds are not available once you separate from service. HSA funds are available even after separation, even in retirement, as described in my previous point.
• Broader range of qualified medical expenses: There are some expenses that are not considered qualified expenses for HCFSA but are considered qualified expenses for HSA. Here are a few notables:
  • Long-term care insurance premiums: Not covered by HCFSA but is covered by HSA.
  • Medicare Part B premiums: Not covered by HCFSA but is covered by HSA.
  • Non-prescription medication and massage: In general, HCFSA will only cover these if a prescription is provided. HSA does not require a prescription.

Which one has the advantage?

You can’t contribute to both in the same year. So which one should you do? Looking at the above bullet points, it seems that HSA has the clear advantage in every single category.  So why in the world would you not do HSA over HCFSA?”

There may be two reasons:

Reason #1 – HSA Requires HDHP:

HSA requires a high deductible health plan (HDHP).  The minimum high-deductible that an HSA plan can have is $1,350 for individual or $2,700 per family. Having a high deductible means that, in a given calendar year the first $1,350 or $2,700 of medically related expenses will have to be paid by you. (This does not apply to preventative care.  HDHP plans cover preventative care immediately even if you haven’t satisfied your deductible).

Is a high deductible bad?

A high deductible means you chose to self-insure on your small expenses, and rely on insurance help only for large expenses. The high deductible lowers your insurance premiums, providing additional savings over and above the tax savings we mentioned earlier.

How much can you save with an HDHP + HSA?

The chart below illustrates the impact high deductibles have on the premium, using the Carefirst HDHP family plan as an example.

(Image courtesy of OPM.gov healthcare comparison tool.)

The Carefirst HDHP plan bi-weekly cost for a family plan is $167.15, as opposed to the other two Carefirst family plans that have bi-weekly costs of $347.21 and $219.19 respectively.

Thus the HDHP saves either $180.06 or $52.04 bi-weekly which amounts to $4,681.56 or $1,353.04 annually.

The lower premiums become even more attractive when you factor in “Premium Pass-through.”  The FEHB HDHP plans use your premiums to fund an HSA account for you. The HDHP plan “pass through” is about $900 – $1,500 of your annual premium into an HSA for you, so the cost of your insurance is really less than it looks.

The HDHP also allows for additional tax savings via the HSA, as mentioned above. If a family sets aside the HSA max of $6,750 they will likely save about $2,880 in taxes!

The combined premium + tax savings is in the range of $3,230 – $7560! That more than compensates for the higher out-of-pocket exposure (see chart above for deductible and out-of-pocket limits. The difference is in the range of $1,500-$1,800).

Reason #2 – Not eligible to participate in HSA:

To be eligible to contribute to an HSA you cannot be enrolled in:

• Any part of Medicare (Parts A, B, C or D).  Even though Medicare Part A is free, it may cost you your ability to contribute to HSA. (Ask your HDHP plan provider about HRA).
• Another non-HDHP health insurance plan, even a spouse’s non-HDHP plan.

To summarize, don’t just re-enroll in the health plan you’ve been using for years. Reflect on the HDHP + HSA advantages which can dramatically improve your present and future financial life.