Lately, many people have contacted me via email and in person to ask me questions along the line of, “which is the better option, Flexible Spending Accounts (FSA) or Health Savings Accounts (HSA)?” That’s why I am making a post today to examine all the pros and cons of each type of savings account and help you decide the best option for your own situation.

Flexible Spending Accounts (FSA): Pros and Cons

First of all, the flexible spending account, also known as a flexible spending arrangement, is a benefit that is employer-sponsored and allows you to put aside a predetermined amount of your income for medical expenses that are not covered by your health insurance policy. These funds would be taken from your paycheck “pre-tax,” and would decrease your taxable income, and thus in many ways an FSA is the best way to increase your benefits in the long-term..

However, there are some drawbacks to FSAs. Firstly, you must be entered into a flexible spending arrangement at the beginning of the year.  If you miss the cutoff date then you cannot enter a flexible spending plan for that year.  Second, the medical expenses that can be reimbursed through your FSA are limited and determined by the IRS, so you must be familiar with the list of approved expenses before deciding just how much money you want to have withdrawn from your paycheck. And thirdly, any unused money in your FSA at the end of the year will be lost and is non-refundable. Funds do not carry over to the following year which is why this is known as the ‘use-it-or-lose-it’ plan.

Health Savings Accounts (HSA): Pros and Cons

A health savings account (HSA) is a tax-advantaged savings account that will allow you to save and withdraw money for certain medical expenses without being taxed. HSAs are really investments that are controlled by you and allow you to add to your savings while being taxed less because you are preparing for future medical expenses. Medical expenses within this scheme include doctor visits, prescriptions charges and dental appointments. They even include the membership to health clubs.

Unlike FSAs, HSAs will roll over to the next year and you will not lose money that you have placed in the account. The only real requirement asked for before you can open a HSA is that you have a high deductible health insurance plan, which is simply any type of health plan that has a higher outlay than the common healthcare plans and must have a maximum out-of-the-pocket limit. These plans normally have a lower monthly premium, offering HSA owners another way of cutting their health care costs.

So to answer the original question of making the best choice, ‘Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs)?’ On the one hand an HSA allows you to prepare for future medical expenses, it cuts the tax you pay while increase opportunities to save and the same time pay smaller monthly health insurance premiums, which makes it the better choice for combating the rising cost of healthcare. You may not however qualify for this option which makes a flexible spending account the best one for you.