[Elizabeth]

Similar question to the recent HSA question. I normally use an FSA to save on taxes because my kids and I have a lot of medical expenses, but not enough to itemize.

If I know none of us are going to need surgeries one year and I want to switch to an HSA for that year, and I invest it and don’t spend it… then the following year could I switch back to an FSA?

Just save the HSA for the future?

I’m sure medical bills for any year can only be paid with whichever I’m contributing to, but can I keep money in an HSA while I use an FSA?

[Sean]

Yes, you can use it at any time after you contribute. The only limit is you can only contribute when you have a qualifying hdhp.
Make sure you’re actually calculating for both plans which one will be cheaper.

With an fsa you are limited to a lower contribution amount, and its use it or lose it, which may prevent you from wanting to even max it out. With the hsa you keep it so you should max it out if you can.

Tax savings wise that could amount to quite a bit depending on your tax bracket and whether you were actually maxing out and using the entire fsa each year prior.

Also, you should get a good chunk in premium savings by going with the hdhp which could easily cause it to come out ahead even if you hit the out of pocket max.

Lastly, be sure you’re looking at if your employer provides any free money into the hsa, and if so include that in your calculations.

I’ve found the increased tax savings of hsa, plus the premium savings made it come out ahead for me personally regardless of how much healthcare I used in a given year.

[Christopher]

Once funds are in an HSA, they’re eligible to be used for any qualified medical expense at any time afterward, even if you’re no longer covered by an HSA-eligible plan.

A common(?) strategy is to save up in one while you’re young with low medical costs (if applicable), and then switch to lower cost plans as that changes, leaving the funds in as a sort of backup Roth that can be tapped early as needed.

So, to answer your question, yes, you can switch, but the HSA funds will be available regardless (I’d leave them invested unless absolutely necessary though, personally).

[Rick]

It is very possible that you have a wacky design set of health plan options. In general, they should not work out wildly different for all but the outlier health situations.

So, switching from paying for you own healthcare to switching to your coworkers paying for your healthcare and back and forth is an odd plan but maybe one you are given by wacky plan design.

A few considerations in favor of the hdhp+hsa

1. Hsa family allows a much larger annual contribution (and tax savings) than the fsa

2. Non hdhp+fsa requires you to be tripley (word?) right on projecting healthcare in thwt you are prepaying vis higher payroll premiums and putting money into a use it or lose it account and that you are putting away less pretax than you could.

Getting this wrong even one year will likely invalidate “savings” for many years.

3. Don’t underestimate the power of compounding on getting both #1 and 2 above right for a few years and then letting it grow in hsa investments for a long time.

Either way, it’s all food for thought. There are wacky plan designs out there for sure.

Just make sure that is your case and not missing a few small but important decisions on hdhp+hsa for the long run.

[Joel]

Why do you think an FSA is superior to an HSA? Is it due to the terms of the insurance plan?

With FSAs there’s a risk of you losing money if you are terminated or separate from service unexpectedly.

Also when enrolling in an FSA you should low-ball your FSA contributions so as to not leave money behind.

And once you enroll in an FSA you cannot increase your contributions to save on taxes on unexpected medical expenses.

Generally HSAs have somewhat higher contribution limits and they cover mostly the same expenses. Also with an HSA, you can increase or reduce your contributions after you start the year.

So if cashflow is tight, this lets you avoid paying federal (and maybe FICA) taxes on ALL of your medical and dental deductibles, copays and max out of pocket.

In other words, you can incur the expenses first and then contribute to save on the taxes after the fact.

HSAs also win if you have the cash flow to use them as a long-term investment vehicle.

But even if you don’t have the cash flow for that, the 20% to 30% savings on taxes (federal + FICA) that’s possible with HSA contributions on unexpected expenses usually trumps a plan with just an FSA … unless the plan with the FSA is just way better in terms of out of pocket expenses.

[Author]

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