HSA vs. FSA: What's the Difference?

HSA vs. FSA: What's the Difference?

August 01, 2022
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Both a health savings account (HSA) and a flexible spending account (FSA) are tax-advantaged savings accounts that help you save money on qualified medical expenses. Though they may have some similar features, they are distinct from one another.  

Here’s what you need to know about HSAs versus FSAs, so you can find which one fits best for you. 

 

Key Takeaways

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  • Both HSAs and FSAs are savings accounts that can cut down taxes and help you save money on qualified medical expenses, such as prescription medications, dental care, eye care, and family doctor visits. 

  • HSAs are flexible because you can manage your own account and money can rollover or be invested. 

  • You must have a high-deductible health plan to be eligible for an HSA. 

  • FSAs are less flexible than HSAs, but anyone can qualify.  

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What is a Health Savings Account (HSA)?  

With an HSA, you can make tax-free contributions, grow tax-free earnings, and use tax-free distributions for qualified medical costs, such as doctor’s visits and prescription medications. If you use your HSA for a nonqualified expense, the withdrawal is subject to an income tax and an additional 20% penalty if you’re younger than 65 years of age. 

To qualify for an HSA account: 

  • You must not be claimed as a dependent on anyone else’s tax returns. 
  • You must not be enrolled in Medicare. 
  • You must be covered under a high-deductible health plan. 

 

Advantages of an HSA 

You can own your own account, not your employer. This means that you can keep your account across jobs. You deduct your HSA contributions on your federal income tax return. If you wish, you can establish an HSA with your employer. This would allow your contributions to the account to be exempt from payroll or income taxes. Some employers encourage HSA use by depositing cash into your account when it is created or annually. 

Savings in an HSA can continually grow without expiration, unlike money in an FSA. You don’t have to use your money in the account by a certain time.  

You can choose whether to keep that growth in cash or invest. You cannot invest FSA funds. 

Both HSAs and FSAs have maximum contribution amounts, though HSAs limits are higher. For 2022, you can contribute up to $3,650 for yourself or $7,300 for your family. 

 

Disadvantages of an HSA 

Only consumers who are enrolled in high-deductible health care plans are eligible for this type of savings account. This means you have a higher deductible than a traditional health insurance plan. Your monthly premium is usually lower, but you usually pay more health care costs out-of-pocket before the insurance company pays its share. Check to see if your health insurance plan describes itself as “HSA-eligible,” as well as double check with your company. 

If you want to know more about deductibles, read our blog here!

 

What is a Flexible Spending Account (FSA)? 

An FSA is a savings account established by your employer where you can stash money for yourself to pay for qualified medical expenses.  This account is tax-advantaged and typically funded by pretax salary reductions.  

 

Advantages of an FSA 

Your funds are available to you the day you enroll. There’s no waiting to access your money. 

You do not need to have a high-deductible health care plan to be eligible for an FSA. No matter your health insurance plan, you can qualify for an FSA, provided it’s offered by the employer. If you’re self-employed, you can’t open an FSA for yourself. 

In addition to your own FSA, you may also have access to a dependent care FSA where you can save for your dependents. 

 

Disadvantages of an FSA 

Unlike an HSA, FSAs have a time-limit. If you don’t use what’s in the account by the end of the year, you cannot use the money. At the beginning of the year, if you miscalculate what you think you might need, you end up losing that money at the end of the year. Additionally, if you switch jobs, you can’t take the FSA account with you. Some employers may provide some flexibility with optional features such as an extended grace period or a rollover provision.  

Both HSAs and FSAs have maximum contribution amounts, though HSAs limits are higher. The annual contribution limit in an FSA is $2,850 in 2022.  

 

See a concrete example.


What are the Differences? 

 

HSA 

FSA 

Who is eligible? 

You must have a high-deductible health plan. 

If your employer offers an FSA, you qualify. 

When does the money expire? 

There is no limit as to when you can use your HSA funds. You can roll unused funds over. 

Unless your employer offers a rollover or extended grace period, you lose leftover funds at the end of the year. 

What are the contribution limits? 

For 2022, you can contribute up to $3,650 for yourself or $7,300 for your family.   

For 2022, the annual contribution limit is $2,850. 

Who owns the account? 

You or your employer can own the account. If you own the account, it is portable from job to job. 

Your employer owns the account. It cannot be taken with you if you change jobs. 

What are the tax benefits? 

Contributions are made tax-free so are not subject to payroll or income taxes. Distributions for qualified medical expenses are not subject to taxes. 

Contributions are either tax-free or tax-deductible. Distributions for qualified medical expenses are not subject to taxes. If withdrawals are made for nonqualified expenses, the withdrawal is subject to an income tax and an additional 20% penalty if you’re younger than 65 years of age.   

 

How to Choose Which Savings Account is Best for You 

While both options can help you save money on qualified medical expenses, you should take some time to see which one would be the best fit. Some questions you can ask yourself include: 

  • Does my employer offer an FSA or HSA account? 
  • How much do I usually spend in a year on qualified medical expenses? 
  • Am I going to be looking to change jobs? 
  • Do I have a high-deductible health insurance plan? 
  • Do I want to invest my funds and allow for growth? 

In general, HSAs are more flexible than FSAs, but it is important to consider both accounts to determine your qualifications and which works best with your medical needs. 

Have questions or want to know more? Contact us!