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From time to time, you may run into instances where you have to make a medical-related purchase that your insurance doesn’t cover. It could be something simple like premium eyeglass frames for new lenses or even something bigger like a dental procedure.
This is where a health savings account (HSA) or a flexible spending account (FSA) can make that financial burden feel a little bit lighter. Both of these accounts are meant for making qualifying medical expenses that aren’t completely covered by insurance, however, they each have some important differences. Also keep in mind that you cannot contribute to both an HSA and FSA account in the same year, so that means you have to choose between them.
Below, CNBC Select breaks down what you need to know about these accounts, including how they work and how to pick the right account for you.
What are HSA and FSA accounts?
An HSA is an account that’s designed to help consumers who have high deductible health plans (HDHP) save for any upcoming medical expenses. To open an HSA, individuals need to meet the following criteria:
- Must be covered under a qualified high-deductible health plan (HDHP)
- May not be covered under any health plan that is not a qualified HDHP
- Must not be enrolled in Medicare (the healthcare component of the Social Security program)
- May not be claimed as a dependent on another individual’s tax return
An FSA is similar to an HSA in that it allows individuals to save for medical expenses. One difference is that you don’t need to have a HDHP to qualify for an FSA; your employer simply has to offer FSA enrollment for you to be eligible to sign up.
Another major difference is that each account has different contribution limits. The new HSA contribution limits for 2024 are $4,150 for single individuals (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023). The FSA contribution limit for 2023 is lower at $3,050 per account, regardless if it’s for an individual or family.
What’s a high deductible health plan (HDHP)?
A HDHP is a health insurance plan that, like the name suggests, has a high minimum amount that must be paid before insurance can kick in and cover the remaining cost of your medical expenses. To be considered a HDHP, the plan must have a minimum deductible of $1,500 for self-only coverage and a minimum deductible of $3,000 for family coverage, according to 2023 guidelines.
How does an HSA work?
An HSA is well-known for having three distinct tax advantages: First off, this account lets you make pre-tax contributions, which lowers your overall taxable income amount. Second, your funds grow tax-free. If you’re able to invest your HSA funds, this works to your advantage since your money grows even if you aren’t making any contributions.
The last tax advantage is that you can withdraw your funds tax-free for any qualifying medical expenses (which is determined by the IRS). If you don’t want to use your funds for medical expenses, you can wait until age 65 to withdraw your funds and avoid incurring any of the penalty fees you’d normally pay for using this money for non-medical reasons. Just note you’ll still have to pay a tax on these withdrawals.
Unlike most FSAs, the balance in an HSA rolls over every year even if you haven’t used any of the funds.
How do FSA accounts work?
Much like an HSA, FSAs help reduce your taxable income by allowing pre-tax contributions. However, you’re unable to invest the money you contribute to an FSA account. Also, you’re typically unable to have your funds roll over to the next year if you don’t use them up, which is a major difference between this account and an HSA.
Some employers, though, may allow you to roll over a small portion of your balance or provide you with a grace period to use up your funds before they “expire” but that’s up to the employer to decide.
Also, unlike an HSA account which stays with you regardless of where you work, you’ll lose your FSA account if you change jobs and will have to enroll in a new account with your new employer.
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Should you choose an HSA or FSA?
It’s important to remember that you cannot contribute to both an HSA and an FSA at the same time even if you meet all the requirements for both accounts (some exceptions may be made for limited purpose FSAs that only cover dental and vision expenses and dependent care FSAs that cover eligible expenses related to elder and child care). This means you’ll have to decide which account is best for your needs.
An HSA is most advantageous when you don’t require frequent out-of-pocket medical expenses. This is because it doesn’t follow a “use it or lose it” policy like FSAs do. This gives your money time to grow so if you do get hit with a large medical expense in the future, you should hopefully have a higher balance able to cover the bill. Plus, if you never wind up using your HSA funding when you’re younger, you’ll be able to use these funds in retirement.
If you have some more regular medical expenses throughout the year, an FSA could make more sense since the money is “use it or lose it” and having more regular medical expenses makes it more likely that you’ll spend the balance before it expires.
Make sure you do this before getting either account
Before you enroll in an HSA or FSA, you should consider covering some other financial bases. This means having an emergency fund with an amount that makes you feel confident in your ability to afford large expenses should an unexpected event occur.
If you’re more concerned with your retirement savings than any health expenses, you should prioritize contributing to both an employer-sponsored 401(k) account and a Roth IRA before you worry about an HSA or FSA since the 401(k) and Roth IRA are designed for retirement funding. Plus, the Roth IRA is extremely tax-advantaged in the sense that you invest post-tax money that grows over time and you won’t have to pay taxes on your withdrawals in retirement. On top of that, the Roth IRA has a much higher contribution limit of $6,500 for 2023. This is a benefit you’ll want to take advantage of before turning to an HSA or FSA, which both have significantly lower contribution limits.
What are some alternatives?
If you don’t qualify for either an HSA or FSA or neither account makes sense for you, there are still some other smart ways you can go about saving for healthcare-related costs on your own.
If your primary goal with an HSA is to use it as a retirement savings vehicle but you don’t qualify for this account, you could instead just open a Roth IRA from a reputable brokerage and make contributions to that. CNBC Select also recommends Betterment as another robo-advisor option.
Betterment
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn’t require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
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Fees
Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee
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Bonus
Up to $5,000 managed free for a year with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC
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Investment vehicles
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Investment options
Stocks, bonds, ETFs and cash
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Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
And instead of an FSA, you might consider just opening a high-yield savings account to stash away money meant exclusively for out-of-pocket medical expenses. A high-yield savings account can even be more appealing for the simple fact that you won’t have to worry about losing your contributions if don’t use them by the end of the year. Plus, the account isn’t tied to your employer so you can open it whenever you want.
It can sometimes feel confusing or disorienting having to save for multiple goals, so savings accounts that provide a “bucket” feature can come in handy so you can make deposits toward specific goals. Wealthfront’s cash account includes this feature so you can create a “medical expenses” bucket and start depositing money. Otherwise, Synchrony Bank is another solid option since it offers account holders an ATM card to easily withdraw cash (not many other banks offer an ATM card with their high-yield savings account).
Wealthfront Cash Account
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Monthly maintenance fee
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Minimum deposit to open
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Minimum balance
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Annual Percentage Yield (APY)
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Free ATM network
19,000 free ATMs through Allpoint.
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ATM fee reimbursement
None reimbursement for ATMs outside of the network
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Overdraft fee
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Mobile check deposit
Available with the Wealthfront App
Pros
- Relatively high APY and up to $5 million in FDIC insurance coverage for individual Cash accounts.
Cons
- Limited ATM network with no reimbursement
Synchrony Bank High Yield Savings
Synchrony Bank is a Member FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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Monthly fee
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Maximum transactions
Up to 6 free withdrawals or transfers per statement cycle
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Excessive transactions fee
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Overdraft fee
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Offer checking account?
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Offer ATM card?
Pros
- Strong APY
- No minimum balance or deposit
- No monthly fees
- Easy ATM access
- 1 physical branch (in Bridgewater, New Jersey)
Cons
- No option to add a checking account
Bottom line
HSA and FSA accounts are both meant for helping you afford any medical expenses that aren’t covered by insurance. However, these accounts may not be best suited for everyone. As always, you should consider your personal needs before deciding one way or the other.
If you don’t think either account makes sense for you, you can instead consider investing your money on your own or opening up a high-yield savings account meant for medical expenses.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
