HSA vs FSA - 5 Reasons HSA's Will Replace FSA's
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This document compares Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), giving 5 reasons why HSAs are better. HSAs can be rolled over each year without penalties, are portable, can be invested like retirement accounts to grow over decades, help plan for future retirement health expenses, and allow choice of provider. In contrast, FSAs must be used each year or funds are forfeited, are owned by employers, do not earn interest or grow long-term, and expire each year. The document recommends considering HSAs for budgeting given rising healthcare costs and their unmatched savings and growth features compared to FSAs.
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HSA vs FSA - 5 Reasons HSA's Will Replace FSA's
- 1. HSA vs FSA 5 Reasons HSA’s Will (Slowly) Replace FSA’s
- 2. Health insurance is changing. While the “insurance” for catastrophic expenses remains, much of the smaller, day to day costs are now paid by you.
- 3. Whether you have a PPO, HMO or HDHP, you likely have co- pays, deductibles and other out of pocket expenses. Many people already feel they are in “high deductible” health plans.
- 4. One recent (2015) survey from the firm Arthur J. Gallagher found the average deductible across health plans for a family was $3,000, and for singles was $1,200. And this was in network care.
- 5. Employers are responding to rising healthcare costs by shifting some responsibility onto their employees. This is a decade long trend and employees (and retirement savers) should assume it wll continue, and plan accordingly.
- 6. This is why becoming familiar with Health Savings Accounts (HSA’s) is so important. Most employees will need to determine a cost/benefit analysis for their health insurance. Not only for healthcare, but overall budget and retirement preparation.
- 7. Five Reasons to consider HSA’s over FSA’s
- 8. 1. HSA’s roll over every year, no “use or lose” penalty. You must use your FSA balance each year otherwise the funds are forfeited ($500 rollover recently enacted).
- 9. 2. HSA Account Portability. Employers “own” your FSA plan, those are their dollars. On the other hand, an HSA. is much like a 401(k). Those funds are yours day one.
- 10. 3. HSA’s can be investment accounts and grow like your 401(k) and IRA. An FSA is essentially an annual debit account. An HSA can be invested in mutual funds and grow for years and decades.
- 11. 4. HSA’s help you plan for retirement health expenses. Unlike FSA’s which not only pay no interest, but expire each year, HSA’s can be used for retirement planning.
- 12. 5. HSA’s offer consumers a choice of providers. Not only are HSA’s portable, you can also choose your account provider.
- 13. No one looks forward to increasing healthcare costs. Yet in your budgeting it makes sense to consider the 20+ year trend. HSA’s offer unmatched savings and growth features when compared to FSA’s
- 14. Thank You! Download the free HSA Coach app to manage your HSA and watch your wealth grow. Available on iOS and Android.
Editor's Notes
- Hi. This is Aaron Benway from HSA Coach here to provide you with a few ideas on comparing health savings accounts (or HSA’s) with flexible spending accounts (or FSA’s), and why the distinction between the two will matter more and more.
- So as I’ve discussed in other videos, health insurance is changing. Gone are the days where insurance simply covered your doctor and hospital bills. Driven by large increases in the cost of healthcare over the past two decades, employers can simply no longer afford this approach to delivering healthcare benefits.
- As a result, whether you have a PPO, HMO or HDHP, the most common forms of employer-sponsored private health insurance, you likely have out of pocket expenses that grow from year to year. As our own research at HSA Coach underscores, deductibles have grown so high that many people feel as though they already have a high deductible health plan, even though their plans often don’t qualify according to IRS guidelines.
- One recent survey from the firm Arthur J. Gallagher found the average deductible across health plans for a family was $3,000, and for singles was $1,200. Importantly, these deductibles were only for in-network care. Out of network care deductibles were even higher.
- Employers are responding to healthcare costs by shifting some of the payment responsibility onto their employees. This is a decade long trend and employees should assume it will continue, and plan accordingly.
- This is why becoming familiar with Health Savings Accounts is so important. Most employees will need to determine a cost/benefit analysis for their health insurance. Not only for healthcare, but overall budget and retirement preparation.
- So here are five reasons to consider HSA’s over FSA’s
- As many of you know, your FSA is money available to you for use during a plan year. Recent changes allow $500 to be rolled over from year to year. However, in order for the health consumer to avoid losing those funds, you need to estimate your health expenses over a year in advance while you are making your open enrollment decision. That would be challenging in any environment, all the more so with changes to health plans, deductibles, co-pays and out of pocket expenses.
- Your employer must follow strict IRS guidelines, which in this case means your FSA isn’t really your FSA. It actually belongs to the employer. Should you leave mid-year any amounts you may have contributed and not spent remain in the employer’s plan. HSA’s, on the other hand, work like a 401(k), and are individual accounts owned by you, the consumer. You take HSA balances with you from employer to employer.
- Recall an FSA essentially expires at the end of a plan year and needs to be replenished the following year. Much like saving for your child’s education when the cost of college continues to grow faster than your own income, health costs must be addressed the same way. Increasingly consumers will look for ways to get ahead of this cost curve, and often years in advance. The most common way to do that is through long term investing, primarily in mutual funds.
- So by now you are likely detecting a theme. HSA’s are increasingly a savings tool for retirement planning. With similar mutual fund options as your employer’s 401(k) or your own IRA, many HSA plans offer brokerage accounts which enable you to invest in long term growth, like stock and bond mutual funds. Out of pocket healthcare costs are the third largest cost in retirement. If you are able you should incorporate this major expense into your savings strategy.
- Unlike your 401(k), where you are limited to the choices made by your employer, as an HSA account holder you can actually roll your funds to another HSA custodian whenever you want. A note of caution, however. You will want to first deposit those funds into your employer’s vendor to take advantage of the pre-tax savings available through your payroll deductions. After the funds are deposited, however, the balances are yours to invest as you find appropriate.
- As a final word, no one looks forward to increasing healthcare costs. Yet in your budgeting and retirement planning it makes sense to consider the decades long trend. HSA’s offer unmatched savings and account growth when compared to FSAs, and will increasingly become the savings vehicle of choice for retirement planners.
- Hang tight. We’ll publish more.