Even the best health insurance plans may not cover all your medical expenses. Affordable Care Act-compliant plans typically cover 60% to 90% of your total care costs. Plans that don’t comply with the Affordable Care Act, like catastrophic and high-deductible plans, cover even less. But don’t worry, there are other ways to cover your healthcare expenses beyond your insurance policy.
You can use supplemental plans like flexible spending accounts (FSAs) and health savings accounts (HSAs) to cover additional costs like copays and coinsurance. Let’s look at the key differences between HSAs and FSAs.
HSA (Health Savings Account):
- Eligibility: You need a high deductible health plan (HDHP) to open an HSA and must not be a dependent or Medicare-eligible.
- Contribution Limits: In 2022, you can contribute up to $3,650 for an individual HSA and $7,300 for a family plan.
- Tax Benefits: Contributions are pretax, grow tax-free, and withdrawals for eligible expenses are tax-free.
- Ownership: You own the account and can take it with you if you change jobs.
- Advantages: Higher contribution limits, tax-free growth, flexibility in changing contributions, and unused funds carry over indefinitely.
Advantages of HSAs:
- Higher Contribution Limits: You can contribute more compared to FSAs.
- Tax-Free Growth: Your contributions can grow tax-free.
- Flexibility: You can change or stop contributions anytime.
- Unused Funds: They carry over indefinitely.
- Portability: You can take it with you when you change jobs.
Disadvantages of HSAs:
- Strict Eligibility: You must have an HDHP to be eligible.
- Penalties: There are penalties for improper use of funds.
FSA (Flexible Spending Account):
- Eligibility: If your employer offers an FSA, you can contribute regardless of income or insurance plan.
- Contribution Limit: The 2022 limit is $2,850 per individual per employer.
- Tax Benefits: Contributions are pretax.
- Ownership: Your employer owns the account.
- Advantages: Immediate availability of funds and fewer eligibility restrictions.
Advantages of FSAs:
- Immediate Availability: You have access to the full amount of your expected contribution immediately.
- Few Eligibility Restrictions: Most employees can contribute.
- Per-Account Contribution Limits: You can contribute to multiple FSAs up to the limit.
Disadvantages of FSAs:
- Unused Funds: Most funds don’t carry over to the next year.
- Portability: You can’t take it with you if you change jobs.
- Contribution Changes: Limited to open enrollment periods.
The Verdict: Should You Choose an HSA or FSA?
- Choose an HSA if: You have low medical expenses, expect job changes, want a retirement income source, and value contribution flexibility.
- Choose an FSA if: You can use funds within the year, aren’t eligible for an HSA, and prefer immediate access to contributions.
In conclusion, both HSAs and FSAs have their pros and cons. If you’re eligible for both, consider contributing to both for maximum benefits. Also, review your other tax-advantaged accounts to make the most of your money and plan for the future.
