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In: Finance

HSAs (Health saving Account) and FSAs (Flexible spending Account ) which is better? and why ?

HSAs (Health saving Account) and FSAs (Flexible spending Account ) which is better? and why ?

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Expert Solution

A Health Savings Account (HSA) is a tax-advantaged account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions are made into the account by the individual or the individual's employer and are limited to a maximum amount each year.

A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money. This means you’ll save an amount equal to the taxes you would have paid on the money you set aside.

While there are benefits to both types of savings accounts, there are also important differences to keep in mind. You have to be enrolled in a high-deductible plan to be eligible for a health savings account. If you're in the high-deductible plan, certainly you should open your health savings account. Even if you don't usually have high medical expenses throughout the year that you think you'll need HSA funds for, the account can be used strictly as a way to build up savings and reduce your taxable income.

A flexible spending account offers the same savings and pretax benefits as an HSA, but to someone in a higher cost health plan — one with a higher premium and lower deductible. It essentially works the same as an HSA, but you can't contribute as much money to it.

A health savings plan will only let you use what is actually in your account at that point in time though, while a flexible spending account will let you spend up to your designated amount for the year even if the money hasn't been deducted from your paycheck yet.

Both are different and have advantages and disadvantages.


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