When planning for medical costs, two tax-advantaged options often come up: Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). Both can help you save money, but they work differently. Understanding their features will help you make the best choice for your situation.

What Are FSAs and HSAs?

Flexible Spending Accounts (FSAs): Offered through employers, let you set aside pre-tax dollars for qualified medical expenses. However, they come with a “use-it-or-lose-it” rule—most funds must be spent within the plan year, though some employers allow limited carryover or a short grace period.

Health Savings Accounts (HSAs): Available to those enrolled in a High-Deductible Health Plan (HDHP), offer triple tax benefits: contributions are pre-tax, growth is tax-free, and withdrawals for qualified expenses are tax-free. Unlike FSAs, HSAs are fully portable and funds roll over year after year.

Key Differences at a Glance

Contribution Limits for 2026.

Health Care FSA: $3,400 per individual.

HSA: $4,400 for self-only coverage and $8,750 for family coverage. Those 55 and older can contribute an additional $1,000 catch-up contribution. You can make contributions up until the tax filing deadline.

Qualified Expenses

Both accounts cover medical, dental, vision, and certain over-the-counter items.
However:
– FSAs cannot pay for insurance premiums or long-term care.
– HSAs can cover premiums for COBRA, Medicare (but not Medigap) and long-term care insurance within annual IRS limits.

Which Should You Choose?

Deciding between an FSA and HSA often starts with your health plan. If you’re considering an HSA, you’ll need a High-Deductible Health Plan (HDHP). But is an HDHP right for you? Here’s how to evaluate:

1. Compare Annual Premiums and Out-of-Pocket Costs

HDHPs typically have lower monthly premiums but higher deductibles.
Traditional plans usually have higher premiums but lower deductibles and copays.
Estimate your total annual cost: Annual Premium + Expected Out-of-Pocket Expenses (including deductible, copays, and coinsurance).

2. Consider Your Medical Needs

If you expect frequent doctor visits or ongoing treatments, a traditional plan may cost less overall.
If you’re generally healthy and rarely need care, an HDHP could save you money.

3. Emergency Fund Matters

HDHPs require you to cover a higher deductible before insurance kicks in.
Make sure you have sufficient emergency savings to handle unexpected medical bills without financial stress.

4. Employer Contributions

Some employers contribute to HSAs, which can offset your costs and make HDHPs more attractive.

Summary

An HSA might work if you have an HDHP, want long-term savings, and like the idea of investing for future healthcare needs.

A Health Care FSA lets you set aside a fixed pre-tax amount for eligible expenses, with the full annual balance available upfront. If you leave your employer after spending more than you’ve contributed, you don’t have to repay the difference. However, any unused funds generally stay with the employer, so plan carefully to avoid losing money.

Planning for retirement: If  an HSA works for you and you have other funds to pay for medical expenses, consider letting your HSA grow. HSAs can act like a “healthcare retirement account,” offering excellent tax advantages.

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