Spot the difference

Contextualizing the finance news you need to know.

Whenever Uncle Sam offers us a place to set aside some of our pre-tax income, we take it—even when it’s for something as stressful as healthcare. But Uncle Sam also confusingly gives us two healthcare account options with similar names: the FSA and the HSA. You’ve gotta be strategic when using an FSA versus an HSA because each account type comes with a very different set of perks and caveats.

Let’s start by looking at their names: A health savings account is for saving, while a flexible spending account is for spending. So any of your hard-earned money left unspent in an FSA goes *poof* when you switch employers or reach the end of your benefit plan year (although some plans allow partial carryovers). But funds in an HSA never expire and are yours to keep even if you change jobs. You know, so you can save ’em.

This means your strategy for using each will be different, according to Prudential financial planner Silvia Tergas. While an FSA gives you access to your entire yearly contribution amount at the start of every plan year, an HSA allows you to skip the future spending predictions. Plus, you can invest HSA funds, securing what Tergas calls a triple tax advantage:

1. Your account contributions are tax-deferred.
2. You can invest the funds and secure tax-free growth.
3. You get to use the funds on qualified medical expenses.

Sounds sweet, right? But there’s a catch. To contribute to an HSA, you have to enroll in a high deductible health plan, which doesn’t work for everyone.

“So before you start to figure out whether an HSA or an FSA is right for you, you really have to [ask yourself], ‘Given my [...] situation, do I have some sort of health condition where I have large out-of-pocket health care payments? [...] Is a high deductible health plan right for me? Or do I want to fall under a different health plan [like a PPO]?’” said Tergas.

If you’re someone who requires ongoing medical treatment or specialist visits, having a high deductible can make those costs add up quickly, she said. “Even though the HSA might pack all these benefits, going with a plan that has some more comprehensive coverage might be the way to go.”—Isabel