HSA vs. FSA: What’s the Difference?
Flexible spending accounts and health savings accounts let you save money to spend later on medical and healthcare expenses that aren’t covered by your insurance plan. Whereas both can be great ways to pay for healthcare using pretax money, that’s where the similarities end.
You can’t contribute to an FSA and an HSA simultaneously. So, when it’s time for open enrollment, you need to choose the medical savings account that will best help you manage rising healthcare costs. Read on to learn about the pros and cons of these accounts.
How FSAs and HSAs Compare
Here’s a look at the differences between FSAs and HSAs:
|Flexible Spending Accounts||Health Savings Accounts|
|Plan Eligibility||Workers whose employers sponsor a plan||Individuals under age 65 with a high-deductible health plan|
|Who May Contribute?||Employee, employer||Employee, employer, family members and others|
|Contribution Limits||$2,750 for individual health FSA plan||$3,600 for individual HDHP; $7,200 for family HDHP|
|Contribution Availability||Annual contribution amount is available on first day of plan year, regardless of contribution date||Available balance only|
|Who Owns Account?||Employer||Employee|
|Account Portability||In the event of a job change, can only be continued while employee has COBRA||Employee-owned, so stays with employee regardless of job change|
|Unused Funds||Forfeited unless employer offers grace period||Roll over without limit|
|Plan Enrollment and Contribution Changes||Allowed during open enrollment, qualifying life event or when employee starts work with a new employer||No restrictions except contribution limit|
|Early-Withdrawal Penalties||Unlikely, as employee files claim for reimbursement||20% penalty in addition to income tax|
Flexible Spending Account Basics
A flexible spending account allows you to save money to put toward out-of-pocket healthcare costs. You contribute pretax money. Whenever you incur a qualified medical expense, you submit a claim to your employer and your employer reimburses you from your FSA balance. The reimbursement is tax-free for qualified medical expenses.
Your employer can offer one or more of the different types of FSA accounts. Each covers different things:
- Health FSA: Standard FSA for all qualified medical expenses
- Limited-Purpose FSA: Dental and vision care only
- Dependent-Care FSA: Child day care and adult day care
With a health FSA, you can have up to $2,750 taken out of your paycheck to pay for medical expenses for yourself, your spouse or your dependents over the course of a year.
Employees can contribute to their own FSA accounts, but the IRS also allows employers to make contributions on a worker’s behalf. If you contribute to an FSA during the year and don’t use all of the money in the account by the end of the plan year, you forfeit any remaining balance.
However, the IRS allows companies to choose one of two types of grace periods. The first type of grace period gives you extra time — up to two months and 15 days after the end of your plan year — to use your remaining funds from the previous year. The second type of grace period allows employees to roll over up to $550 of the remaining balance in the account. This money can be used in the following plan year to pay for medical expenses.
Employers are allowed to offer one of these two options, but not both. In addition, employers are not required to offer either option.
Good To Know
Employers can offer a 12-month grace period from the plan’s year-end for employees to carry over unused 2021 funds into 2022. If you stopped participating in your employer’s FSA plan in 2020 or 2021, your employer can still reimburse your qualified expenses through the end of the plan year as long as you have an unused balance to cover the costs.
FSA Pros and Cons
If you’re expecting high medical bills for the year, an FSA might be a good choice. If, on the other hand, you’re young, healthy and have decent benefits, it’s likely that your out-of-pocket expenses for medical care will be low. In that case, an FSA might not be for you.
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Weigh the pros and cons of an FSA before deciding whether to enroll.
- Contributions are based on pretax money, so your taxable income will be lower.
- You can save for medical expenses you think you might have during the year.
- The full annual contribution amount is available to use immediately after you contribute it.
- You can use the account to pay for out-of-network providers and alternative healthcare.
- Money is taken directly out of your paycheck, making it easy and convenient to save.
- Health FSAs have a relatively low maximum annual contribution amount — just $2,750 for 2021.
- You can lose the money if you don’t use it by the end of the plan year, or before the end of any grace period your employer offers.
- FSAs are available only through an employer.
- With the exception of 2020 and 2021 expenses, only expenses that occur during the calendar year are eligible for reimbursement.
- When you separate from an employer, you also leave the FSA account behind.
Health Savings Account Basics
Health savings accounts are paired with high-deductible health insurance plans. Participants can make pretax contributions to their HSA that grow tax-free and can be withdrawn tax-free when used to pay for qualified medical expenses. Rather than having to wait to be reimbursed, like with an FSA, you can pay for qualified expenses using a debit card linked to your account.
An HSA plan allows you to save up to $3,600 a year for an individual — or $7,200 for a family — to pay for medical expenses. Funds are tax-deductible and can be withdrawn tax-free for qualified medical expenses. Unlike an FSA, any money you use during a plan year can be rolled over. You can even use the funds after you retire.
However, whereas you can have an FSA with any kind of health plan, HSAs require you to have a high-deductible health plan. For 2021, that means you must have a deductible of at least $1,400 if you are an individual or $2,800 for HDHPs for families.
Employees can contribute to their own HSA accounts, but the IRS also allows employers to make contributions on a worker’s behalf.
HSA Pros and Cons
An HSA is likely a good choice if you don’t have major health problems — you can use unspent funds to pay for healthcare in the future. Remember, your savings keep rolling over indefinitely, and they’re yours to use as you wish once you turn 65. But you’ll pay income tax on those withdrawals.
However, if you expect high medical care costs in the coming year, the requirement to have a high-deductible health plan means an HSA might not be the best choice.
Weigh the pros and cons of an HSA before deciding whether to enroll.
- Contribution limits are higher than for FSAs.
- You don’t need to guess in advance what your medical expenses will be for the following year.
- You keep the account if you change jobs.
- Any balance rolls over indefinitely.
- The money you contribute is tax-deductible, grows tax-deferred and can be withdrawn tax-free for qualified medical expenses.
- You must carry a high-deductible health plan to qualify for an HSA.
- It’s probably not the best choice for people with chronic or expensive medical conditions.
- It can be tough to find the savings to contribute the maximum amount to your HSA.
- You must pay taxes on any money you take out of your HSA for nonmedical expenses.
FSA vs. HSA: Which Is Better?
To determine which plan is best for you, do the math. If you have an HSA, remember that a high-deductible healthcare plan typically offers lower premiums, but comes with co-payments, coinsurance and out-of-pocket limits. And if you have an FSA and don’t spend the full amount, eventually you’ll have to forfeit any unused balance.
Both plans include a lot of fine print, so make sure you read plan documents. If you still have questions, talk to someone in your human resources or benefits department.
Daria Uhlig contributed to the reporting for this article.
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- Mayo Clinic. "Health savings accounts: Is an HSA right for you?"
- Cigna. "HSAs, HRAs, and FSAs."
- IRS. 2021. "Publication 969 (2020), Health Savings Accounts and Other Tax-Favored Health Plans."
- HealthCare.gov. "High Deductible Health Plan (HDHP)."