Health savings accounts (HSA) and flexible spending accounts (FSA) allow a person to use pretax income to pay for eligible medical care. An individual can set up an HSA, whereas a person’s employer sets up an FSA.
This article will examine the differences between FSAs and HSAs, how to set them up, and how to choose between them.
An FSA is a spending account that some employers provide their employees. It allows a person to save money for eligible healthcare expenses.
A person does not pay tax on the money saved in their FSA. This means the person has less taxable income, allowing them to retain more of their paycheck.
Information from the Federal Flexible Spending Account Program notes that FSAs can help a person to save an average of 30% on their eligible medical expenses.
People can choose how much money they want to put into their FSA yearly. However, it cannot be more than $3,050 per individual.
A person’s employer may also contribute to their FSA. However, a person cannot take any savings with them if they move jobs.
Money saved in an FSA generally has to be used within a year. However, a person’s employer may allow them up to 2.5 extra months to use their FSA savings. Additionally, some employers allow a person to carry over up to $610 from their FSA into the next year.
An HSA is a savings account that a person can set up alone only if they have a high deductible health plan (HDHP).
An HDHP is a health insurance plan that requires a person to pay a higher deductible than other insurance plans. A deductible is an amount someone must pay before their insurance contributes.
For example, if a person has a procedure that costs $3,000, and their deductible is $1,300, then their insurance will cover $1,700.
A person’s HDHP contributes a portion of their premium to their HSA. A premium is an amount a person pays toward their insurance plan every month. The premium paid into HDHPs is generally lower than other insurance plans.
The money a person deposits into an HSA is tax-free. In 2022, a person can contribute $3,650 toward their HSA. For family coverage, this amount goes up to $7,300.
The money a person saves in an HSA rolls over into the next year. This means the account can build up over time. Additionally, certain HSAs gain interest or other earnings over time. This money is also not taxable.
The following table shows the key differences between FSAs and HSAs:
| FSA | HSA | |
|---|---|---|
| Who is eligible? | A person is eligible for an FSA if their employer offers it as a benefit. | A person with an eligible HDHP can qualify for an HSA if they have no other health plans, are not on Medicare, and are not listed as a dependent on another person’s tax return. |
| Maximum annual contribution | $3,050 per individual. | $3,650 for individuals or $7,300 for family coverage. |
| Account ownership | A person’s employer. | An individual. |
| Who can contribute to the account? | A person and their employer. | A person, their employer, their spouse, and their family members. |
| Rollover rules | The employer can keep any money left in the account by the end of the year. However, depending on the plan, a person can have a 2.5-month grace period or carry over $610 into the next year. | All money in the account rolls over into the next year. |
| Is the account portable? | No. The account belongs to a person’s employer, and they cannot take any funds with them if they change jobs. | Yes. |
| When can contributions change? | People must decide at the start of the year how much they want to contribute to their FSA. An employer may allow midyear changes due to qualifying events, such as a change in marital status or the number of dependents. | A person can change their HSA contributions at any time. |
| Penalties for withdrawing funds for nonmedical expenses | A person cannot use FSA funds for nonmedical purchases. | Any funds withdrawn for nonmedical purposes will be taxed. If a person is under 65 years old, they will have to pay a 20% tax penalty. |
| Investment options | None. | Possibility for interest accrual in qualifying HSAs. |
The savings plan a person chooses depends on their circumstances. The ideal plan for one person may not be suitable for another. Keep reading to learn more about the specific benefits of each.
FSA benefits
FSAs may benefit a person who needs access to medical funds immediately. Once people decide how much they want to pay toward their FSA per month, they can receive a reimbursement for the annual amount.
Unlike an HSA, a person with an FSA can have other health insurance plans and Medicaid.
HSA benefits
There are various benefits to using an HSA, including:
- being able to keep funds when changing jobs
- not having to use the full amount in the HSA before the end of the year
- the possibility of accumulating interest
A person cannot have an FSA and an HSA unless they have a Limited Expense Health Care Account FSA (LEX HCFSA).
There are three types of FSA available:
- Health Care FSA (HCFSA): An HCFSA can help a person pay for any eligible healthcare costs.
- LEX HCFSA: A LEX HCFSA can be used to pay for any eligible dental or vision care costs. Other medical costs are not eligible. A person can also have an HSA if they have a LEX HCFSA.
- Dependent Care FSA (DCFSA): A person can use a DCFSA to pay for any eligible dependent care services belonging to their child or another dependent.
Below are some examples of plans.
FSA example
A person receives an FSA from their employer. They choose to contribute $2,400 annually because of an ongoing medical issue. They pay $200 into their account per month, and their employer pays $1,000 per year.
In March, the person needs $1,300 for an operation. They have only paid $600 into their FSA. However, they have access to the full $2,400. This allows them to pay for their procedure and pay back the remaining costs over time.
The person makes $20,000 per year. However, due to their FSA, they only pay tax on $17,600.
HSA example
A person sets up an HSA. They pay $200 per month into their HSA and have an HDHP premium of $50. Their deductible is $3,000.
After paying $200 per month into their HSA for 5 years with no expenses, they have a total of $12,000 saved. They have a sudden medical bill of $6,000. They pay $3,000 from the HSA toward the costs, and their HDHP pays $3,000. Now they have $9,000 remaining in their HSA.
A person will not pay any taxes on money deposited into their HSA.
If a person’s employer provides an FSA, the employer should set it up for them.
A person must have an HDHP to set up an HSA. A person may receive an HSA from their employer. If a person wants to set up their own HSA, they can check whether their HDHP partners with any HSA providers. Alternatively, a person can ask their bank if they provide this.
Although FSAs and HSAs are medical savings accounts, they have many differences. FSAs can provide funds more quickly. HSAs are more flexible.
People should research both accounts before deciding which one is right for them.