What is the practical difference between a Health Savings Account and a Flexible Spending Account? What are the pro's and con's of each, and are there situations where either is best?
To be in a health savings account you must be in a high deductible health plan, but the advantage is that the money rolls over from year to year if you don't use it, but it can only be used for qualified medical expenses.
A flexible spending account has its advantage as well: You can use it for medical expenses, but it's part of a cafeteria plan and you lose the money that you don't spend by the end of the year (rather than it simply rolling over to the next). Another benefit in a FSA is that if you allocate 200/mo to it, and you need to get surgery in January that costs 2400 dollars and then you lose your job in February, you just got 2400 dollars of surgery for 200 dollars pre-tax :)
In summary: Move to France for real health care :) just kidding
A health savings account can be helpful if your employer does not facilitate either an HSA or FSA since as an individual, simply by having an HSA-eligible health plan you can open an HSA on your own, and then contributions made to it can be deducted.
That being said, if the employer gives you the option to have deductions be made from your payroll to contribute to your HSA, that is better because then you save more in taxes as there isn't FICA still taxed on it.
Note that you can have BOTH an FSA AND an HSA but then the FSA can only be used for limited purposes such as eligible dental / orthodontics / vision expenses.
Some other benefits of the HSA are
- You can invest the money
- The HSA has a higher dollar limit per year
- Even if you no longer have a qualified HSA-compatible health plan, you can still use money that you previously contributed to the HSA to pay for medical expenses that you incur - the tax deduction is tied to the contribution to the HSA, not the eligible withdrawals from it