Navigating healthcare options and costs can be complex for anyone, and even more so for those dealing with dependent care costs for a child or a disabled dependent. Thankfully, Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Dependent Care FSAs can provide significant financial relief, but each of these accounts has unique features and purposes, making it essential to understand how they differ, and which might be best for your situation.
With healthcare and medical costs continuing to rise, these accounts can provide significant tax benefits for those who are eligible.
1. Health Savings Accounts (HSAs)
What are they and who are they ideal for?
Health Savings Accounts are tax-advantaged savings accounts designed to help individuals save for medical expenses. HSAs can only be paired with high-deductible health plans (HDHPs), which means you must be enrolled in such a plan to qualify.
HSAs are ideal for individuals who are generally healthy and want to save for future medical expenses while enjoying tax benefits.
Key Features:
- Tax Advantages: Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Additionally, the account grows tax-free.
- Portability: HSAs are owned by the individual, not the employer, which means they remain with you even if you change jobs or health plans.
- Qualified Expenses: Funds can be used for a wide range of qualified medical expenses, including deductibles, copayments, dental care, and vision care.
- Contribution Limits: As of 2024, individuals can contribute up to $4,150, and families can contribute up to $8,300. Those 55 and older can add an extra $1,000 as a catch-up contribution.
2. Flexible Spending Accounts (FSAs)
What are they and who are they ideal for?
Flexible Spending Accounts are employer-established benefit plans that allow employees to set aside pre-tax money for out-of-pocket health expenses.
FSAs are ideal for employees with predictable medical expenses who can estimate their healthcare spending for the upcoming year.
Key Features:
- Tax Advantages: Similar to HSAs, contributions are made pre-tax, reducing taxable income.
- Contribution Limits: For 2024, employees can contribute up to $3,200.
- Use-It-or-Lose-It: Unlike HSAs, FSAs generally have a “use-it-or-lose-it” rule, meaning you must spend the funds within the plan year (though some plans allow a grace period or a limited carryover).
- Qualified Expenses: Funds can be used for many medical expenses, like HSAs, including over-the-counter medications, copays, and certain health products.
3. Dependent Care FSAs
What are they and who are they ideal for?
Dependent Care Flexible Spending Accounts specifically help employees pay for eligible dependent care expenses, allowing them to work, look for work, or attend school full-time.
These accounts are only available to parents or guardians who need assistance covering dependent care costs while they work or attend school. Married individuals are generally only allowed to use a dependent care FSA if both are working or actively looking for work. However, there is an exception if the parent is not working due to a disability or because they are participating in educational training as a full-time student.
Key Features:
- Tax Advantages: Like HSAs and regular FSAs, contributions are made pre-tax, lowering taxable income.
- Contribution Limits: For 2024, the maximum contribution is $5,000 per household (or $2,500 if married and filing separately). You can contribute maximum to both an FSA and Dependent Care FSA in the same year if your employer offers both.
- Eligible Expenses: Funds can be used for daycare, after-school programs, summer camps, and other care services for dependents under the age of 13, as well as for care for disabled dependents.
- Use-It-or-Lose-It: Like traditional FSAs, any unused funds may be forfeited at the end of the plan year.
| Feature | HSA | FSA | Dependent Care FSA |
| Eligibility | High-deductible health plans | Employer-sponsored | Employer-sponsored |
| Tax Benefits | Tax-deductible contributions, tax-free growth | Tax-deductible contributions | Tax-deductible contributions |
| Contribution Limits (2024) | $4,150 (individual), $8,300 (family) | $3,200 | $5,000 |
| Catch-up Contribution | $1,000 additional
(age 55 & older) |
N/A | N/A |
| Portability | Yes | No | No |
| Qualified Expenses | Medical expenses | Medical expenses | Dependent care expenses |
| Use-It-or-Lose-It | No | Yes | Yes |
Understanding the distinctions between HSAs, FSAs, and Dependent Care FSAs is crucial for making informed decisions regarding healthcare and dependent care. Although the summary above provides some of the more important rules for these plans, there are additional factors that you should consider before opening an account. One thing that is often overlooked for Dependent Care FSAs is that the full amount that you have elected for the plan year is not available immediately like it is for a traditional FSA. Your total annual election amount is prorated over your payroll periods and more becomes available for use as each period passes.
Before opening one of these accounts, you should evaluate your individual needs, healthcare spending patterns, and family situations, so that you can select the account(s) that best suit your financial goals and lifestyle. We also recommend consulting a financial advisor or benefits specialist to optimize your choices and maximize tax savings.
Presented by Mitch Strobel, CFP®
