A health savings account (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 as “qualified medical expenses,” including deductibles, copayments and coinsurance, and monthly prescription costs. In most 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, too, although those benefits aren’t the same.
Health savings accounts are not typical savings accounts, and they’re available only to people who have a high-deductible health plan, or HDHP. Every year the government determines the minimum deductible amount a plan can have to qualify as an HDHP, as well as the maximum amount an individual can contribute to an HSA. Go here to see those numbers for the current year.
If your employer offers an HSA, you’d fund it pretax from your paycheck. If not, HSA contributions are 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’d likely fund it pretax from your paycheck. HSA funds can also be invested, so if your HSA custodian allows it and you don’t spend much, the balance can grow tax-free.
To qualify for an HSA, an HDHP must be your only health insurance plan, you must not be eligible for Medicare, and you cannot 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 before you buy that the plan is “HSA-eligible.”
» MORE: What is an HSA?
When you withdraw funds to use for qualified medical expenses, you don’t pay taxes on the money. If you use the money for other expenses, you must 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.
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. The rule for the money is “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. Even in that case, the amount you could roll into the next plan year is limited by the IRS to $500.
FSAs are available only as a benefit from an employer — you can’t get one on your own.
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. However, if you leave your company in the middle of the year, you’ll likely have to pay back spent funds that haven’t been covered by your paycheck deductions yet.
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)|
|Eligibility requirements||Eligibility requirements include having a high-deductible health plan (HDHP).||Employer must offer this benefit.|
|Contribution limit||Higher contribution limits, including option to double contributions for families.||Lower contribution limits; no option to double.|
|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.|
|Rollover||Unused balances roll over into the next year.||You forfeit any unused balance unless your employer allows a rollover, capped at $500.|
|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.|
|Effect on taxes||Contributions are tax-deductible, but can also be taken out of your pay pretax. Growth and distributions are tax-free.||Contributions are pretax, and distributions are untaxed.|
You probably can’t have both an HSA and an FSA
If you qualify for an HSA, you cannot 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 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.
Even though HDHPs are some of the cheapest plans available, the trade-off is very high out-of-pocket costs.
In general, healthier and younger people with few prescriptions or medical conditions are likely to do better with an HSA and HDHP. That’s because even though HDHPs are some of the cheapest health plans available, the trade-off is very high out-of-pocket limits — often more than $16,000 for a family per year. That’s far more than you’re allowed to contribute to an HSA. So 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.
And 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 rule of thumb as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs and anticipated doctor’s visits.