Date: June 1, 2017

The financial challenges that go hand in hand with paying for health care are among some of the most significant many families face. Numerous health care options exist, including two consumer-directed plans — health savings accounts and flexible savings accounts. Understanding the difference between the two will help you decide if they’re viable options for you.

Establishing an FSA

Your employer is responsible for opening a flexible spending account, or FSA, on your behalf, and it belongs to him, not you. But you can contribute to it with pre-tax dollars deducted from your paycheck up to $2,550 as of 2015. Any taxes withheld from your pay are based on what’s left after your FSA contribution. 

You must decide in advance how much of your paycheck you want to contribute to your FSA for the year, and you’re locked in to this annual amount after you declare it.

Establishing an HSA

You can open a health savings account, or HSA, yourself — you don’t need your employer’s cooperation, and you own it. This type of account is also funded with pre-tax money, and your employer can add to it if she chooses to. If you contribute to your HSA with money that’s already been taxed, these contributions are tax deductible. You have the right to choose how the money in your HSA is invested, unlike with an FSA. If you opt for an HSA, you can contribute up to $3,350. This limit is not expected to change in 2016.

Maintaining Other Health Insurance Coverage

You’re not required to carry additional health insurance coverage if you choose an FSA. But if you have an HSA, you must be covered by a compatible, high-deductible health plan, and you cannot be anyone’s dependent for tax purposes.

Making Withdrawals

You can withdraw funds from your FSA for all qualified medical expenses, including copays, coinsurance, deductibles and those medical expenses not covered by your insurance if you’re carrying an additional health plan. You can make the same withdrawals from an HSA. Neither FSAs nor HSAs cover over-the-counter medications unless they’re prescribed by a physician. 

Although you must be enrolled in a HDHP, or a high-deductible health plan, to make contributions to your HSA, you can withdraw the money even if you’re no longer covered by that plan. Your withdrawals are never taxed provided you use them for qualified medical expenses. You’ll pay a 20 percent penalty plus taxes, if you take the money out of your HSA for any other reason prior to age 65. The penalty is waived after age 65.

You Could Lose Your FSA Contributions

You can begin using the money in your FSA before it’s fully funded for the year, which isn’t the case with an HSA. And, if you have any money left in your FSA at the end of the year, you’ll lose it. Your employer may allow you to roll over as much as $500 of any unused money to the next year or give you a little extra time (until March 15) to use the funds. 

The possibility of losing your funds is an important consideration when you’re deciding at the beginning of the year how many pre-tax dollars you want to direct to your FSA. Money you invest in an HSA remains yours even if you don’t spend it all by the end of the year.