What the Heck is the Difference Between an FSA and an HSA, Anyway?! (And Why You Should Have One)

Americans spend over twice as much per capita on healthcare as the average developed country does, at an average of $8,508 per person per year. That adds up to $2.8 trillion, or a staggering 18% of our GDP (that’s Gross Domestic Product, as you remember from our handy dictionary!).

Yep, health care is expensive, and we’re not always so good about paying for it, either. 1 in 5 Americans is contacted by bill collectors about medical debt, and medical debt accounts for $1 out of every $3 owed in collection accounts, far more than all other debt in collections. So how can you take care of yourself and your family without breaking the bank? FSAs and HSAs can help.

FSA stands for a Health Care Flexible Spending Arrangement (FSA), and is a benefit that your employer sponsors that lets you set aside pre-tax dollars out of your paycheck to pay for eligible health care expenses. Any money you put into the plan avoids both Federal Income Tax and FICA, which means you get more bang for your buck.

An HSA, or Health Savings Account, has similar advantages but is structured a little differently. HSAs combine high deductible health insurance with a tax-favored savings account. Money in the savings account can help pay the deductible, and then once that deductible is met, the insurance kicks in and starts paying. Money left in the savings account earns interest and is yours to keep. Contributions to your HSA are 100% deductible — just like an FSA — and withdrawals to pay for qualified medical expenses, including dental and vision, are tax-free.

I know what you’re thinking: “Yeah, but how is this going to save me money??” Despite continually rising health care costs, you and your wallet have some good options for taking care of health care expenses; in fact, now more so than ever. That’s because in 2013, the IRS revised the rules to allow employers to offer FSAs with carryover, which got rid of the stress and pressure of the old “use-it-or-lose-it” policy where you’d have to spend your annual contribution by the end of the year or forfeit the total amount. Now, like with an HSA, you can carry your FSA over from year to year — which makes it way easier to budget for the long haul.

Your FSA can be used for things like dentist visits, dermatology exams, eyeglasses and LASIK, medical equipment, and even programs to stop smoking. And now that you can invest in an FSA with carryover, it’s time to pounce. The easiest way I’ve seen to do this is to ask your employer about a Visa card; most employees can access their FSA funds through a Visa debit card, so it’s easy to pay for all kinds of eligible healthcare expenses. I’m always saying that you need to get Future You and Present You on the same page, and this is a great way to do it: you can plan for the health and longevity of Future You while conveniently taking care of Present You, now.


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