HSA vs. FSA: Differences and How to Choose
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A health savings account, or HSA, and a flexible spending account (or FSA, also called a flexible spending arrangement by the IRS) are both tax-advantaged accounts that allow you to save specifically for medical costs. Aside from that, there are several key differences between HSAs and FSAs.
What are HSAs and FSAs?
Both HSAs and FSAs allow people with health insurance to set aside money for health care costs referred to by the IRS as qualified medical expenses. These include medical care, prescription drugs, dental and vision care, over-the-counter medications and other health-related items. In many cases, you receive a debit card for your account and can use it to pay for qualifying expenses. Both types of accounts have tax benefits, but there are some differences to be aware of.
What to know about HSAs
Health savings accounts are not typical savings accounts, and they’re available only to people who have a high-deductible health plan, or HDHP. In 2022, an HDHP is any plan with a deductible of at least $1,400 for an individual or $2,800 for a family, with maximum out-of-pocket spending at $7,050 and $14,100, respectively. Here are the important points:
There's a contribution limit.
In 2022, people with individual health insurance can save up to $3,650 to an HSA, and people with family coverage can save up to $7,300.
Contributions are pretax or tax-deductible.
If you’re considering opening an HSA with a private insurance plan, you can deduct the year’s contributions from your taxes when you file. If your employer offers an HSA, you can fund it pretax from your paycheck or you can make tax-deductible contributions.
HSA funds can be invested — and roll over year to year.
If your HSA custodian allows it, your funds can be invested. If you don’t spend the money on medical costs right away, the balance can grow tax-free. The balance in an HSA also rolls over year to year, so you can save to the account now and use it for medical expenses in the future, even after you no longer have an HDHP.
You must qualify for an HSA.
To contribute to an HSA, an HDHP must be your only health insurance plan, you must not be eligible for Medicare and you can't be claimed as a dependent on someone else’s tax return. Not all plans with high deductibles qualify for HSAs, so it’s important to check with the insurer that the plan is “HSA-eligible” before you buy.
The money you use for eligible medical expenses is tax-free.
When you withdraw funds for qualified medical expenses, you don’t pay taxes on the money. If you use the money for other expenses, you’ll owe income taxes on the distribution and will be required to pay a penalty tax. Once you enroll in Medicare, you may no longer contribute to the HSA but can withdraw from it for other expenses without the penalty tax.
Your employer can contribute.
Like a 401(k) plan, your employer can contribute toward your HSA, and about eight out of 10 employers offer this benefit. This can help you cover the higher deductible if you have medical costs, or it can be saved for future expenses. The employer contribution counts toward your annual contribution cap.
What to know about FSAs
Flexible spending accounts come only as part of a benefits package from an employer — you can't get one on your own — but the medical expenses you can use them for are the same as HSAs. Here's what you should know:
Like HSAs, there’s a limit on FSA savings.
In 2022, you can contribute up to $2,850 to an FSA, and your spouse can also contribute up to $2,850 to their FSA if their employer offers one.
The money is use it or lose it — sometimes.
FSA money can be “use or lose,” meaning you lose any amount you haven’t spent at the end of the year unless your employer has selected a rollover option or opted for a grace period. If your employer opts in, they can let you carry over up to $570 in 2022, or they can offer a grace period of 2½ months to spend leftover funds.
The money is pretax and available upfront.
The money in an FSA comes out of your paycheck before taxes, in regular increments, but these accounts are generally “pre-funded.” In other words, though you haven’t paid in yet, the full contribution amount you selected during open enrollment is available to spend at the beginning of the year.
Employers can contribute, but most don’t.
Although employers can contribute to health FSAs, it’s unusual for them to do so. Only about 5% of workers received employer FSA contributions in 2019, according to the Employee Benefit Research Institute. Unlike an HSA contribution, employer contributions to health FSAs don't count toward the annual contribution cap.
In general, electing to sign up for an HSA or FSA is a good financial move. Knowing which one to select and how to get the most out of it will take some education.
Important differences between HSAs and FSAs
Health savings account (HSA)
Flexible spending account (FSA)
You must have a high-deductible health plan, or HDHP, to save to an HSA.
Your employer must offer this benefit.
Higher contribution limits, including the option to double contributions for families.
Lower contribution limits; spouse can contribute to their own employer-sponsored FSA if available.
Changing contribution amount
You can change how much you contribute to the account at any point during the year.
Contribution amounts can be adjusted only at open enrollment or with a change in employment or family status.
Unused balances roll over into the next year.
You forfeit any unused balance unless your employer allows a rollover or a grace period.
Connection to employer
Your HSA can follow you as you change employment, and you needn’t be employed to contribute as long as you have an HDHP.
In most cases, you’ll lose your FSA with a job change. One exception: if you’re eligible for FSA continuation through COBRA.
Employers commonly offer a contribution toward an HSA, which you can use to cover health costs.
Employers can contribute toward an FSA, but most don't.
Effect on taxes
Contributions are tax-deductible, but can also be taken out of your pay pretax. Growth and distributions are tax-free if used for eligible medical expenses.
Contributions are pretax and distributions are tax-free and can only be used for eligible medical expenses.
You probably can’t have both an HSA and an FSA
If you qualify for an HSA, you can't elect to set up both an HSA and an FSA, unless the FSA is a “limited-purpose” FSA. Your employer’s HR representative will be able to tell you if this is the case.
A limited-purpose FSA works like a regular FSA but can be used only for things not covered under your main health insurance policy, such as vision care and dental expenses. If you expect to have high medical costs throughout the year or want to maximize contributions to your HSA while minimizing your withdrawals, using a limited-purpose FSA for expected vision and dental expenses could be a smart choice.
Should you choose an HSA or an FSA?
Both accounts have benefits that can make managing your out-of-pocket medical expenses easier throughout the year.
In general, healthier and younger people with few prescriptions or medical conditions are likely to do better with an HSA and HDHP, since they're not seeking frequent medical care or paying for regular medications.
Even though HDHPs are some of the cheapest health plans available, the trade-off is high out-of-pocket limits — as much as $14,100 for a family in 2022. If you had high medical costs, you’d still have a significant amount to pay out of pocket, even if you contributed the maximum to your HSA.
Other health plans cost more per month but cover more costs upfront. For that reason, folks with high medical costs can often find savings with a more generous plan than an HDHP, disqualifying the HSA as an option.
It's worth doing the math on any plans you're comparing: Calculate how much you'd expect to pay for both plans in yearly premiums, deductibles and out-of-pocket costs, factoring in any employer contributions.
While FSAs offer less flexibility than HSAs, an FSA will still help you save money, and can be paired with any plan — if your employer offers it.
A good guideline as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs, typical over-the-counter pharmacy spending and anticipated doctor’s visits.