HSA vs. FSA: Whats the Difference, and Whats Better?
Tax Savings, Contribution Limits and Things to Know About HSA vs FSAs
Depending on the kind of health insurance plan you have, you may be eligible for an HSA or an FSA. Taking advantage of these kinds of accounts or plans can help you save money and prepare for medical expenses that come up during the year.
HSA and FSA's have different qualifications and advantages in different circumstances. Here is an overview with everything you need to know to help you understand the basics and choose the best plan.
What Is a Health Savings Account (HSA)?
An HSA is a savings account with tax advantages that can be used in combination with a High Deductible Health Plan. The funds in the HSA account are accumulated in order to be used for eligible medical expenses by the account holder. Health Savings Accounts have to be tied to High Deductible Health Plans (HDHP), they are not available if you are not enrolled in a qualified high deductible health plan.
Qualified HDHP's Give You Access to Savings Options Through HSA's
A HDHP may make you uncomfortable if you are worried about coming up with money to cover the deductible and out of pocket expenses, but when you look at the key benefits you can take advantage of when you have a high deductible health plan and an HSA, it makes a lot of sense and puts you at an advantage. Two key elements are:
- Lower Premiums save money on your health plan costs
- Access to an HSA can save you tax money now, and create savings long-term
HSA Benefits That Make HSA's a Really Good Idea
Although HSA's have many benefits, which we outline in the easy to reference comparison chart below, two key features are:
- Any money you invest in your HSA can grow tax-free and if you do not spend it on medical costs, then you can keep accumulating these savings for retirement.
- Withdrawing money from an HSA to pay qualified medical expenses is tax-free.
- Earnings in HSA's are not taxed
- If you don't have high medical or out of pocket medical expenses now, you aren't wasting or losing your money, the money builds up over time, so if all of a sudden you do need access to medical funds, you aren't limited to the yearly contribution, the money in the HSA will build over time.
What Is a Flexible Spending Account or Flexible Spending Arrangement (FSA)?
Flexible Spending Arrangements also sometimes referred to as Flexible Spending Accounts, can be used for medical expenses are not linked to HDHP's they can be used with any health plans and are usually offered by an employer as part of a benefits package.
FSA Money Expires at the End of the Year—No Long-Term Savings Potential
You benefit from tax savings of the money you put in your FSA, the problem is, you won't be able to keep any funds left in it at the end of the year if you haven't used them. FSA's do not work well as a long-term savings strategy.*
Saving on Your Taxes With HSA or FSA
With HSA's and FSA's you benefit from tax savings because you can have your money put into your account by your employer or administrator "pre-tax".
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 (LPFSA)". LPFSA's must have a specified purpose, for example when the LPFSA is designated to cover dental and vision costs, and not the regular medical expenses being covered by the HSA.
What Is the Difference Between an HSA and an FSA?
Using the chart below, you can check a variety of different advantages or disadvantages of the HSA vs. FSA.
What Are Eligible HSA and FSA Expenses?
HSA's and FSA's are meant to cover eligible health expenses. Some examples of how people may use their funds may include: Copayments, deductibles, some drugs, as well as many other eligible health care costs. Eligible expenses can be seen on page 8 of form 969: Health Savings Accounts and Other Tax-Favored Health Plans.
Your plan administrator or employer may be able to help you understand the qualified expenses for your health plan.
What Is Better? An HSA or FSA?
Overall an HSA is more flexible, allows you to save money by paying fewer taxes, but also allows 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.
The FSA does not build over time, you lose any amount you put into it at the end of the year, so it is not a long-term savings tool. You also stand to lose your FSA if you change employer, but it still provides the tax savings, so if you don't qualify for an HSA, and you don't have an HDHP the FSA is a good option.
HSA vs FSA Key Differences: Which One Is Better for You?
Qualification or Requirements
You must have a qualified High Deductible Health Plan or HDHP to qualify for an HSA.
The minimum deductible to qualify in 2018 is $1,350 for individual plans or $3,700 for family plans
You can not be enrolled in Medicare
You can not be declared as a dependent on another person's plan
No requirements, usually offered through a group or employer
What Happens If You Change Employer?
Your HSA can follow you.
FSA can not follow you to your new employer, you may lose any amount not spent/used.
HSA will roll over every year, unused funds can be saved in your HSA long term.
FSA funds will expire at the end of the year. You can not save them.*See special notes
Annual Contribution Limit Caps
For 2018 the contribution limit for qualifying medical plans* is $3,450 for individual plans and $6,900 for family plans
For 2018 contribution limit is $2,650, if two spouses have FSA's then each spouse may have an individual contribution limit of $2650 (up from $2,600 in 2017).
Flexibility in Changes of Contribution Amount
Yes, keeping in mind the annual contribution cap
Generally be changed only:
Long-Term Savings Potential
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, must be declared on income tax form and is subject to 20 percent 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.
HSA's may be accessible in different ways, be sure and 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.