As we head into the final months of the year, which is typically the time of year for open enrollment for benefits, lots of benefit questions inevitably arise – particularly in regards to spending accounts like HSA vs FSA. 

• What’s the difference between an HSA and a FSA? 
• What are the potential benefits of using these accounts?
• Which type should you use – or should you use both? 

We’re tackling these questions and more for physicians who want to make sense of their employee benefits in order to better understand their impact.

HSA vs FSA: what are they exactly?

HSA

A HSA (health spending account) is a really special account from an investing standpoint. That’s because it’s a triple-tax-free account, meaning you put pre-tax money in straight from your paycheck. You could put the pre-tax money in just like you would for a traditional 401k, but the cool thing is that it grows tax-free, so when you use it for qualified healthcare expenses, it never gets taxed.

This means that A) Yes, it’s a real investment account with a broker and subject to market performance, and B) it’s the only investment account that never gets taxed – so long as you use it on the expenses that are qualified within the plan.

In a way, this is kind of like a stealth retirement account where you can save money.

Important to know: You must be enrolled in a high deductible plan to qualify for a HSA, so you do end up paying more out-of-pocket for your healthcare expenses in the short-term.

Most beneficial for: Physicians who have the cash flow to sustain their healthcare expenses up until the time that their high deductible is met.

FSA

A FSA (flexible spending arrangement/account) is funded by a voluntary deduction from your gross salary that you can use pre-tax and get reimbursed. It’s a similar process to incurring a business expense: you make a purchase on a new laptop for your business, and you can later use that expense as a tax deduction. 

Important to know: The funds in your FSA stay fixed throughout the benefit year. So, say you put in $1,500 at the start of your benefit year and six months later it turns out you needed $2,500, you can’t increase the pre-taxed contribution. You’ll need to spend time planning for the upcoming year’s potential medical expenses (as best you can – it won’t be 100% perfect). 

Most beneficial for: Physicians enrolled in a regular healthcare plan who still want to pay for healthcare expenses without their money being taxed.

In short, you have a spending account open to you no matter which kind of health insurance plan you choose. You just need to decide which one is best for you at which time.

Curious about a HSA in action?

As someone who has a high deductible plan and a HSA for expenses, I wanted to break down an example of how it works practically for me and my family. 

My family deductible is $8,000, so I’ll be paying out of pocket for medical and healthcare expenses up until $8,000. There’s $7,750 I can use from the HSA on qualified healthcare expenses. 

It’s an interesting dilemma – if you don’t know whether you’ll have a lot of healthcare expenses, what do you do when a lot of healthcare expenses come up? 

Remember: HSA is an investment account.

And because your HSA has the potential to grow beyond the money you’ve put in, I would argue in favor of cash flowing as much of your health expenses as you can. Use your savings, your emergency fund, the cash flow that comes in as part of your paycheck to cover those costs. That way, you save your HSA money so you’re not dipping into the account when the market’s down and guaranteeing those losses.

If you’re able to treat your HSA like a brokerage account, you get the very useful triple-tax-free benefit, and you can save receipts and then turn that money in later.

HSA vs FSA comes down to your current season of life

Ultimately, you have to decide for yourself whether to take advantage of a HSA or FSA. As you’re assessing your options, ask yourself, ”Is this a good plan for me given where I am in life?” For Lisha as a fellow, the FSA suits her needs very well. For me as an attending, the HSA is a better match. The answer will vary based on your financial situation, but the important thing is to have all the knowledge you need to make an informed decision.

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