As healthcare costs continue to rise, it’s increasingly important for individuals and families to understand the options available for covering their medical expenses. Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are two accounts used for similar purposes and are commonly confused. Knowing the key differences between HSAs and FSAs can help you determine which is the best option for your needs.
What is an HSA?
A Health Savings Account (HSA) is a personal bank account used for paying for qualified medical, vision, and dental expenses. In order to open and contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). HSAs offer tax advantages, allowing you to put away pre-tax money that can be used any time without having to pay taxes on the distribution. HSAs are available to single individuals, families, and anyone covered under an HDHP.
What are the Benefits of an HSA?
HSAs have several advantages over other types of accounts. Here are a few of the main benefits:
• The money saved in an HSA can be invested and grow tax-free, similar to an IRA or 401k.
• Funds can be used for qualified medical, vision and dental expenses at any time.
• Funds are portable and can be used even when switching health plans or jobs.
• Contributions grow from year to year and can be used for future expenses.
• Contribution limits are higher than other types of accounts.
• Account holders are allowed to invest in stocks and mutual funds, as well as other investments.
• Accounts are not subject to “use it or lose it” rules like FSAs.
• HSA funds can be used for family members, and the account holder does not have to be the one incurring the expense.
What is an FSA?
A Flexible Spending Account (FSA) is a personal bank account used for covering qualified medical, and sometimes dependent care, expenses. FSAs offer tax advantages, allowing you to put away pre-tax money that can be used any time without having to pay taxes on the distribution. Unlike HSAs, FSAs are offered by employers, and eligibility is usually tied to meeting certain participation requirements or providing proof of essential medical expenses.
What are the Benefits of an FSA?
FSAs also have several advantages. Here are the main benefits:
• Funds can be used for qualified medical and sometimes dependent care expenses at any time.
• Funds are portable, so they can be used even when switching jobs or health plans.
• Contribution limits are lower than HSAs.
• There are no “use it or lose it” rules, allowing unused funds to roll over to the next year.
• Funds can be used for family members, and the account holder does not have to be the one incurring the expense.
• Funds can be used over a period of time within a “run out” period (typically, one plan year + 2 1/2 months after the end of the plan year).
Key Differences Between an HSA and an FSA
HSAs and FSAs are similar in many ways, but there are some key differences that you should understand. Here’s a quick overview of these differences:
• Eligibility: In order to open and contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP), whereas FSAs require an employer’s sponsorship.
• Contribution Limits: HSAs offer higher contribution limits than FSAs. For example, in 2021, the contribution limit to an HSA is $3,600 for an individual and $7,200 for a family. Whereas, the contribution limit to an FSA is just $2,750.
• Investment options: HSA funds can be invested in stocks, mutual funds, and other investments, but FSA funds can only be used to pay for qualified expenses.
• “Use it or Lose it” Rule: HSA funds are not subject to the “use it or lose it” rule, which requires that the funds must be used within a certain period of time or else they will be forfeited. This rule does not apply to HSAs.
• Employer vs. Employee Responsibility: With HSAs, the employee is responsible for making contributions and managing the account. With FSAs, the employer is often responsible for setting up the account and managing the funds.
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are two accounts used for similar purposes and offer tax advantages for covering medical expenses. Knowing the key differences can help you determine which account is best for you. From eligibility and contribution limits to the “use it or lose it” rule and investment options, there are many differences between the two accounts, and understanding them is an important part of setting up an effective healthcare plan.
