HSA vs. FSA: Which Is Better?

Both provide tax shelter for medical expenses, but HSAs are more flexible

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Depending on the kind of health insurance plan you have and the benefits your employer offers, you might be eligible for a health savings account (HSA) or a flexible spending account (FSA). Taking advantage of these accounts can help you save money and prepare for medical expenses that come up during the year.

HSAs and FSAs have different qualifications and advantages, however. Here is an overview of everything you need to know to help you understand HSAs vs. FSAs.

What's the Difference Between an HSA and an FSA?

  HSA FSA
Qualification or Requirements You must have a qualified HDHP to qualify. The minimum deductible to qualify in 2020 and 2021 is $1,400 for individual plans or $2,800 for family plans. You can't be enrolled in Medicare. You cannot be declared as a dependent on another person's plan. No requirements; usually offered through a group or employer
What If You Change Employers? HSAs aren't tied to employment. Your FSA cannot follow you to your new employer, so you may lose any amount not spent/used.
Rollover Rules HSA will roll over every year; unused funds can be saved in your HSA long term. Typically, $550 can be carried into the next plan year or employers may allow an additional 2.5 months to spend the previous year's contributions, depending on what the employer allows. 2020 and 2021 have special rules, allowing all funds to be carried over if the employer allows.
Annual Contribution Limit Caps For 2020, the contribution limit is $3,550 for individual plans and $7,100 for family plans. For 2021, the contribution limit is $3,600 for individual plans and $7,200 for family plans. For 2021, the individual FSA contribution limit is $2,750; however, it is up to the employer to allow contribution up to the limit or not.
Flexibility in Changes of Contribution Amount Yes, keeping in mind the annual contribution cap Generally, can be changed only at open enrollment time, if you have a change in a family situation, or if you change plan or employer
Long-Term Savings Potential Yes No
Penalty for Using the Funds Accumulated savings can be withdrawn in retirement (after age 65) without penalty. If used for non-medical expenses prior to age 65, it must be declared on income tax form and is subject to a 20% penalty. You may have to submit your expenses to be reimbursed by your FSA. Because this is managed by the employer, you may not have access to funds for non-medical reasons. Speak to your FSA administrator or employer for details.
Tax Savings Money can be contributed pre-tax direct from an employer. Contributions are tax deductible and grow tax deferred. Accumulated savings can be withdrawn tax free for retirement (after age 65). Qualified medical expenses are not taxed. Money can be contributed pre-tax direct from an employer. Qualified medical expenses are not taxed.
Special Notes HSAs may be accessible in different ways; be sure to ask if you will have a debit card and how expenses work. FSA plans may allow a small carryover or grace period; however, this is at the discretion of the plan administrator or employer and may not apply in many cases.

Qualifications

In order to be eligible for an HSA, you must choose a high-deductible health plan (HDHP), you cannot be a dependent on someone else's plan, and you can't be enrolled in Medicare. You can open an account through your employer or on your own, as long as you meet these criteria.

An FSA can only be opened through an employer or other group offering it, but there are not additional qualification restrictions as there are for an HSA.

Qualified Health Expenses

HSAs and FSAs are meant to cover qualified health expenses. Health insurance premiums typically aren't considered a qualified medical expense by HSAs unless you're paying for COBRA coverage or receiving unemployment. Prescription medications, including insulin, can be paid for with both types of accounts.

You can typically use the accounts to cover copayments and deductibles for doctor visits and hospital stays. Essential dental care is considered a qualified health expense, but teeth whitening isn't. Eyeglasses are also a qualified expense. In general, if it's something you could deduct as a medical expense on your taxes, you can use HSA or FSA funds to pay for it.

You can withdraw funds from an HSA to use for non-medical spending, but you will pay income tax and a 20% penalty until age 65. After age 65, you only pay income tax on what you withdraw, so an HSA could also be an additional source of retirement funds.

Restrictions

Because both types of plans offer a tax-free way to save for medical expenses, both come with restrictions. However, generally, FSAs are the more restrictive of the two plan types. For instance, you can't transfer your FSA to a new employer when you change jobs and you can only change your contribution during open enrollment or when you have a qualifying life event such as getting married or having a child. These limits don't apply to HSAs.

The biggest difference between the two accounts, though, is in terms of the money you can put in and how long you can keep it there. You can put more into an HSA each year and roll over your leftover balance at the end of the year.

With an FSA, employers may allow you to carry over $550 into the next plan year or allow you a 2.5 month grace period to spend the previous year's funds. Special rules apply for 2020 and 2021, however. If your employer allows, you can carry over your full contributions from 2020 to 2021 and from 2021 to 2022.

Tax Incentives and Savings Potential

Both HSAs and FSAs offer the same tax advantages upfront—you can put money into the accounts and withdraw it to pay medical expenses tax-free. However, HSAs offer far greater tax advantages and savings potential.

Because you can rollover your balance each year, your HSA becomes another savings vehicle within your broader financial portfolio. This money also grows tax-deferred, meaning you won't pay any taxes on the growth until you withdraw the money. And, if you withdraw it during retirement, you can withdraw it tax-free after age 65. Because of these features, many people use HSAs for a secondary retirement savings account.

With both HSAs and FSAs, you benefit from tax savings because the funds you deposit are pre-tax. That means they're deducted from your income before taxes are calculated, reducing how much you pay in taxes.

Which Is Right for You?

Overall, HSAs are more flexible. They allow you to save money by paying less in taxes and enable you to save money long term, since whatever you don't use in any given year will roll over and accumulate as savings over time. You do have to purchase an HDHP, though, and not everyone is comfortable with a high-deductible insurance plan.

An FSA doesn't build up over time, and you can lose leftover funds at the end of the year. You also stand to lose your FSA if you change employers. It does offer tax savings and budgeting for medical expenses, so if you don't qualify for an HSA, an FSA is a good option.

Can You Have an HSA and an FSA at the Same Time?

You can only have an HSA and an FSA at the same time if the FSA is designated as a limited-purpose FSA. These FSAs must have a specified purpose, such as covering long-term care costs rather than the regular medical expenses being covered by the HSA.

Key Takeaways

  • HSAs and FSAs are both tax-advantaged savings accounts for medical expenses.
  • You must have a high-deductible health plan to contribute to an HSA.
  • HSA funds can carry over from year to year, and you can withdraw funds without a penalty at age 65 or older to use them for non-medical purposes.
  • FSAs are typically offered by employers, and funds typically don't carry over in full from year to year.
  • FSA funds can be carried over from 2020 to 2021 and from 2021 to 2022.