FSA vs. HSA: What to Know About the Accounts to Pay Medical Costs

FSA vs. HSA: What to Know About the Accounts to Pay Medical Costs

Research firm Morningstar evaluated 10 HSA plans in October based on criteria such as fees, savings rates and investment options. (The company only examined accounts available directly to individuals and not accounts offered by employers, so details may vary.) Fidelity Investments was the only provider to outperform in both spending and overall investments received a “high” rating. The HSA offered an interest rate on savings well above 2 percent, while its competitors paid less than 1 percent.

“That’s a big drawback,” said Greg Carlson, senior manager research analyst at Morningstar.

Here are some questions and answers about health accounts:

Sara Taylor, senior director of employee spending accounts at social security consultant WTW, suggests taking a close look at your past medical expenses before deciding how much to contribute to your FSA. “It’s difficult for some people,” she said. But looking at your “statement of benefits” for last year – the forms that describe what treatments you’ve had and what share of the costs you owe – can help you come up with a reasonable number. Was last year an anomaly because you had major surgery? If so, you may want to deposit a smaller amount. Many employers offer online tools to help you create an estimate.

It’s also helpful to know what you can spend FSA money on. That way, if you have a balance at the end of the year, you can use the money to purchase eligible over-the-counter items like painkillers and even sunscreen. A helpful resource is the FSA Store, which contains an online alphabetical list of eligible and ineligible items.

No one wants to miss out on funds, but workers can still come out ahead because of the tax advantages of FSA contributions compared to non-contributions, Mr. Spiegel said. Assume a hypothetical worker with a marginal tax rate of 30 percent (including federal, state, payroll and local taxes) contributes $1,500 to an FSA, achieving tax savings of $450. If the employee receives less than $450 back to the employer, the employee still benefited from participation.

This year, an employee can contribute up to $3,200 in payroll deductions to an FSA (but few contribute the maximum amount, perhaps due to “inertia,” Mr. Spiegel said. The amount deferred tends to remain consistent from year to year, perhaps because (Employees are unaware that the limit can change annually.) The average contribution in 2022 was just under $1,300.

For HSAs, individuals can contribute up to $4,150 in 2024 and families can contribute up to $8,300. Those 55 and older can donate an additional $1,000. For 2025, the limit increases to $4,300 for self-insurance and to $8,550 for family coverage.

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2024-05-17 13:00:10