HSAs Verus FSAs for Corporate Employees: What's The Better Choice?
Health Savings Accounts (HSAs) are becoming increasingly popular and are provided in many corporate healthcare plans. Also, you have Flexible Savings Accounts (FSAs) for healthcare (there also is a dependent care option) that offer similar features but have some significant tax differences with HSAs.
In this blog post, I review the differences between HSAs and FSAs for you, as an employee, and how to make the best plan choice.
1) Both are federally tax-exempt from FICA or payroll taxes --Social Security and Medicare taxes. This is a significant benefit of both types of plans. This would represent a savings of around 15.3% and your federal income tax that does not have to be paid on these pre-tax benefits.
2) A HSA must be partnered with a High Deductible Healthcare Plan, while an FSA does not have to and can be partnered with any insurance. Typically you would have a PPO or low deductible plan with your FSA plan.
3) The employer or the plan owner may fund an HSA. The employer must only finance an FSA. Essentially with an HSA, you can either fund it yourself or your employer. So there is more flexibility with the HSA.
4) With an HSA, there are no deadlines to use the funds. While with an FSA must be spent by the end of the calendar year, along with some grace periods. So essentially, you use it or lose it with an FSA. This is a significant drawback for FSAs.
5) Contribution limits are higher for the HSA at around $3,650 for self-only and $7,300 for families, and FSA is $2,850 for 2022 per individual.
6) Employer matching funds are counted towards the limits for an HSA, but this is not the case for an FSA.
Overall, the choice of HSA versus FSA depends upon your healthcare needs and how you view paying for healthcare. FSAs can be good when paired with a low deductible plan such as a PPO. Most of your healthcare is covered, giving you peace of mind that not all medical expenses will come out of pocket.
While an HSA is excellent for someone that does not mind paying out of pocket for medical care, if you have modest healthcare needs, HSA might be a great choice. Essentially, you will need to budget enough to pay for medical expenses.
Myself, I prefer an FSA over an HSA. I find that I like the piece of mind that my medical care is covered for my family. But everyone is different. The HSA represents a great option to save money for future healthcare needs, but it must be paired with a high deductible plan which won't cover most basic needs.
I believe healthcare insurance should be used depending on your needs, not as a savings vehicle or investment plan, so choose a plan that fits what you need for medical care as the priority. Contact me on the contact page below if you want to discover how FSAs or HSAs fit into your financial plan.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.