Should I contribute towards an HSA / Limited Purpose FSA or a Healthcare FSA?

Lucky you! You probably got to this page because your company offers you the choice between contributing to an HSA or a healthcare FSA.

The rule of thumb is that you should choose an FSA if you have predictable medical expenses for the year (e.g. a planned surgery). You should choose an HSA if your medical expenses are less predictable.

What is a Health Savings Account (HSA) and why should I contribute to it?

An HSA lets you pay for qualified medical expenses using pre-tax dollars.

Pros:

  • You can use the funds you contributed to the HSA after you leave the company.
  • Typically, you can update how much you want to contribute throughout the year.

Cons:

  • Your account has $0 when you start so if you have a big medical expense early in the year, you won't be able to use your HSA to pay for it.

What is a Healthcare FSA and why should I contribute to it?

A Healthcare FSA is a pre-tax savings account used to pay for medical and dental expenses not paid for by your insurance.

Pros:

  • Your account is fully funded with the contribution you selected at the start of the plan year. If you have a big medical expense early in the year, you'll be able to pay for it using your healthcare FSA! 

Cons:

  • You're locked into your annual contribution and you can't change it in the middle of the year unless you have a qualified life event.
  • If you don't use all the money you contributed by the end of the plan year or if you leave the company, the outstanding money in your account is forfeited. There might be some exceptions (e.g. there might be a certain amount that you can carry over at the end of the plan year), so talk to your HR administrator.

What is a Limited Purpose FSA?

A limited purpose FSA is a pre-tax savings account used to pay for only dental and vision expenses not paid for by your insurance. Medical expenses are not covered. It has the same advantages and disadvantages of a healthcare FSA, but it’s only available if you’re enrolled in an HSA.