Trying to choose between a Flexible Spending Account (FSA) or Health Savings Account (HSA) can be a challenge. But weighing these two pre-tax plan options is similar to a process many of us are more familiar with— car shopping.
When shopping for a car, your first decision might be whether you want to buy or lease. You begin accessing (a) how long you keep the vehicle, (b) maintenance and repairs and (c) long term outlook. A similar framework applies to choosing between an FSA and HSA.
Let’s start by exploring ownership and its effect on how long you keep your account.
If you buy a car, you drive it off the lot and it’s new home is your driveway. Alternately, when you lease a car, you drive it off the lot knowing you only get to use it for a certain window of time before returning it.
HSA = Buying
When you choose an HSA, it is like buying a car. You own funds deposited into the HSA. Because of this, if you change jobs, retire or even change health plans, you can still use the money in the HSA. There is no set time period in which you must use the funds since it’s your money.
However, when buying a car, you are required to pay for the cost of the car or secure alternative funding. An HSA is similar. If you have an expense before you have funded the HSA, you will need to secure alternative funding to pay for the expense.
FSA = Leasing
An FSA is more like a lease. With a lease, you don’t own the car, but you are allowed to drive it. Similarly, with an FSA, you don’t own the money in the account, but you are allowed to use it for a set time period.
Also, with a lease, you have the use of a brand new car for the low price of a monthly payment. Likewise, with an FSA you have access to the full election and pay it back through regular payroll deductions.
Maintenance & Repairs
Although the parallel isn’t exact, dealing with surprise expenses can be similar.
If you own a car and your transmission unexpectedly needs to be replaced, you will have to find the funds to cover the cost out of pocket. If your lease encounters the same issue, you simply take it in to the dealer for a repair, typically at no additional cost. No surprise expenses to finance.
Regarding the pre-tax accounts, let’s say you sprain your wrist.
With an HSA, you may find yourself initially struggling with a surprise expense. If you don’t have the money in the HSA, you may decide to make adjustments to your contributions or use funds from another source, but largely you are on your own to figure out how to cover the expense.
With an FSA, since all funds are available on day one of the plan year, you would have access to your full elections and likely be prepared for the unexpected expense.
There are pros and cons to both. With an HSA, you have more freedom when it comes to covering your expenses because you can adjust your election based on need. However, with an FSA, you have to pay the same amount every month, whether or not you need the funds. You run the risk of having fewer medical needs than expected and being left with a surplus of money that you have to rush to spend down in order not to lose.
When buying a car, you are making a long-term commitment. You are trusting that once the car is paid for, you are able to stash a little something extra each month. An HSA is similar. You might struggle a little when getting started, but you know that every year will not involve a major expense. Over time, you are able to stash a little (or hopefully more) to get ahead.
Alternatively, your lease has a defined cost every year. This is like an FSA. You will set an election based on what you will use during the plan year. There is no long-term planning. You simply view it as each and every expense.
Making a Choice
In both scenarios, what you go home with is based on several factors. Certain components of each account are regulated and operate a certain way, while other parts offer more flexibility.
*In some cases, your employer may offer an Extended Grace Period or a rollover. Check your Plan Highlights for details. See “What are plan highlights and where do I find them?” for more information.