FSA and HSA Features

FSA

Contributions. You have to predict your expenditures in advance. The FSA is a great way to use pretax money to pay for eyeglasses, contact lenses, LASIK eye surgery and copays for regular medications. You can save up to $2,550 in 2016.

Eligibility. You can only have an FSA if you have an employer who offers one.

Changes. Once you have chosen the amount to contribute, you can’t modify it unless you have a change in circumstances. So if you elect a high contribution because you expect to have an expensive surgery then don’t have the operation, you still have to contribute that amount and run the risk of losing it if you don’t have other medical expenses.

Withdrawals. You can withdraw money before you put it in, up to the amount you have chosen to contribute for the year.

Fees. Most FSAs do not have any fees.

Investments. You cannot invest the funds in your FSA, and the funds do not earn interest.

Carryover. You have to spend the money in your FSA by the end of the year or you forfeit the money. Some employers allow you to carry over up to $500 to the next year. “You have to be pretty comfortable estimating your expenses for the coming year,” Pollitz says.

Tax on withdrawals. You do not pay any taxes on the money you withdraw.

HSA

Contributions. You don’t have to predict your expenditures in advance. The money is yours, and the account is in your name and is not tied to your job. If you reach retirement and have not spent all your money, you can use it to pay health care costs in retirement. Your employer may contribute to your HSA. That money is yours to keep, whether you need it for medical care or not.

Eligibility. You can have an HSA even if you are self-employed, as long as you have an eligible high-deductible plan. The ACA exchange offers plans that are eligible for an HSA, as do private insurers.

Changes. You can change your contribution amount at any time or contribute nothing, though choosing a high-deductible plan with an HSA may not make sense if you don’t plan to make any contributions.

Withdrawals. You can only use money you have already contributed to pay for health care costs.

Fees. An HSA usually comes with a relatively small monthly fee, though some employers may pay the fees.

Investments. You can invest the unused funds in your HSA, just as you would with a brokerage account of 401(k). All the earnings are tax-free if they are used for medical expenses.

Carryover. You don’t have to use the funds in your HSA for medical expenses when you incur them. You can elect to pay your medical expenses out of pocket and use the HSA as essentially another retirement account. However, if you incur medical expenses, you can withdraw money to cover those expenses years later if you save the receipts. If you’re laid off in 2017, for example, you have the option of going back and taking out tax-free as much money as you have spent on medical expenses since you established the account if you didn’t do it at the time.

Withdrawals. You do not pay any taxes on money you withdraw for medical expenses. If you withdraw money for any other reason before you reach 65, you pay taxes plus a 20 percent penalty. If you withdraw funds for purposes other than medical care after age 65, you pay taxes on the withdrawal but no penalty.