Healthcare costs can be difficult to manage. Medical expenses are on the rise, and saving money while doing anything is a must. With a Health Savings Account (HSA) or Flexible Spending Account (FSA), small business owners can save money and earn higher interest on balances. understanding how these accounts are key potential factors in your financial planning.

HSAs are specifically made for people who have HDHPs. They help in putting money aside on a pre-tax basis to be used for qualified medical expenses. There are several other things that make HSAs very attractive, including the benefits associated with them.

You see, when you contribute to your HSA, your contribution is tax-deductible. This means you reduce your taxable income and, therefore, the tax you had in effect. An HSA can be used to pay for doctor visits, medicine, and even some dental and vision care.

One of the biggest advantages of HSAs is that the funds roll over from year to year. With an HSA, you don’t have to worry about losing your money if you don’t spend it all within a certain period, like with some other accounts. In addition, you can keep the account even if you switch jobs or health plans, which makes HSAs portable.

Who can open an HSA?

To open an HSA, you must have an HDHP. These plans usually have higher deductibles yet lower premiums, making them ideal for those not expecting to undergo many medical procedures. If you have HDHP, you can open an HSA through your employer or a financial institution.

What are Flexible Spending Accounts (FSAs)?

A flexible spending account is another way to control your medical costs. Unlike an HSA, which is tied to you, the employee, FSAs are accounts the employer holds for you in which you can sock away pre-tax money to use on your qualified medical expenses. These accounts are actually quite flexible because they can be used for virtually any healthcare cost: copays, medications, and even some over-the-counter instruments.
When you enroll in a flexible spending account, you decide how much money you want to contribute for the year. That total amount is then automatically deducted from your paycheck in equal installments, with the deducted amount spread out over the rest of the year. You have access to the total money right on point, even if the total amount has not been fully contributed by then.

One major difference between FSAs and HSAs is the rule that a person either uses the money in his FSA or loses it. Usually, he loses it, or his employer may require him to forfeit his remaining FSA monies at the end of the year. However, the employer might implement a grace period or allow a small percentage to carry over for the next year, but it must emphasize that planning the expenses should be taken into consideration in order not to forfeit them.

Who is eligible for an FSA?

FSAs are available to employees through their employers. Unlike an HSA, you do not need to have a certain type of health plan to enroll. This makes FSAs a flexible option for many workers. If you expect ongoing medical expenses to continue throughout the year, then an FSA can definitely lower your taxable income by saving you money.

Choosing between an HSA and an FSA will typically depend on a number of factors, which include your needs, situation, and, more importantly, your employment status. If you know the difference between an HSA and an FSA, then you might have a better idea of how you can choose the right one.

Tax Advantages

Both HSAs and FSAs have tax advantages; the difference is in the way these tax advantages are applied. It is the triple tax benefit that currently applies to HSAs. Contributions are tax-deductible, interest or investment income is tax-free, and withdrawals for expenditures are tax-free. FSAs are, therefore, tax-favored savings arrangements that eliminate taxes on the funds deposited, although they do not offer savings growth with the advantages provided in HSAs.

Flexibility and portability

HSAs can be used in a more flexible manner regarding the time and method of utilizing such funds, and since money in the HSA is transferred yearly without being used and the account stays with you in case of a job change, the saving option through an HSA is more for the long term. FSAs, on their part, are often limited in flexibility by the “use-it-or-lose-it” rule and being tied to one’s employer.

Limits on Contribution Amount

Contribution limits also vary between HSAs and FSAs. In 2024, an individual can contribute a maximum of $4,150 into their HSA, and a family can contribute as much as $8,300. You can contribute up to $3,050 in the case of FSAs. These rules, if you want to max them out, you need to take into consideration.

Both HSAs and FSAs can be spent on a wide variety of medical expenses, but there are a number of differences. Also, under very limited circumstances, funds in an HSA can be taken out without penalty to pay for Medicare premiums or to buy long-term care insurance. Generally, an FSA can be spent on a much wider array of medical-related items, but the restrictions for carryovers and the “use-it-or-lose-it” rule make them less attractive for long-term savings.

Maximizing your health savings

Whether you go with an HSA or an FSA, it’s fairly important to clearly understand how these accounts work so that you can maximize your health savings. Here are a few tips to get the most from your account.

Estimate Your Expenses: Plan ahead and find out how much you’ll spend on your health annually, and you will be aware of how much needs to be put into the FSA so as not to lose money.

Keep Track of Eligible Expenses: Knowing what is eligible will help you use your money in the right way and take advantage of savings.

Review Your Options Annually: Health plans and benefits can change. That is why, on an annual basis during open enrollment, you should review your options and, if needed, be able to change the amount of your contribution or even the type of account you have.

Conclusion

While both HSAs and FSAs represent good savings opportunities for medical expenses, they have quite different objectives. Knowing their benefits and limitations can help you decide on an account that would work out in your favor. They are accounts that are tools toward the significant planning needs of those who either want long-term savings or those who want to manage their immediate healthcare expenses.

Take time to explore your options; make the most of your health savings today.