It can be a bit confusing to determine which one of the two is right for you, namely the flexible spending account (FSA) or the health savings account (HSA), if you’re signing up for health insurance from your employer. While both accounts provide worthy tax benefits for using the account to pay qualified health care expenses, there are significant differences in who is eligible for an account, who owns the account, how money can be contributed and what happens to the balance if it isn’t used by you.
Individuals often do an FSA vs HSA, FSA/HSA difference comparison or HSA vs FSA because they want to understand what types of accounts are best for their healthcare and financial needs. You can cover qualifying medical expenses with pre-tax money for both accounts, but knowing the accounts’ differences can help you save money and make the best of your money.
This guide also provides an explanation of FSA and HSA, the pros and cons of both, and addresses some frequently asked questions, such as, “Can You Have An HSA and FSA?,” as well as deciding who could be a good fit.
What Is An FSA?
A Flexible Spending Account (FSA) is an employee benefit provided by the employer that employees can contribute pre-tax dollars to cover qualified medical costs.
FSA can be used for such things as:
- Doctor visits
- Prescription medications
- Dental care
- Vision care
- Medical equipment
- Qualified over-the-counter products
Your contribution will decrease your taxable income, to help lower your tax bill overall.
What Is An HSA?
A Health Savings Account (HSA) is a savings account that offers certain tax benefits to certain individuals who participate in an HSA eligible, High Deductible Health Plan (HDHP).
HSAs work much like an FSA, but can be used towards qualified medical costs.
An HSA does have other savings advantages, though, as leftover money is carried over annually and doesn’t give back to the employer just because you switch jobs.
Difference Between HSA And FSA
Both accounts provide support for the costs of healthcare, but there are a number of differences.
Eligibility
FSA
They have the option of taking part in the FSA if the company provides it for most of their staff.
HSA
In order to contribute to an HSA, you must:
Have the choice to be enrolled in an HSA-eligible HDHP.
Must meet IRS eligibility standards.
To not have some of the disqualifying health coverage.
Ownership
FSA
The account is sponsored by your employer.
It will be based on plan rules and the rules and/or regulations applicability after leave of employment.
HSA
The account is to be used solely for your benefit.
Even if you:
Change jobs
Retire
Switch insurance companies
The HSA is not given away.
Tax Benefits
Both accounts have tax benefits.
FSA
Typically, the contributions are made in advance of taxes.
Unless the withdrawal is made in a manner that is considered a qualified medical withdrawal, it is usually tax free.
HSA
There are three key tax advantages to an HSA:
Pre-tax or tax deductible contributions (as determined by how contributions are done)
Tax-Free Investment Growth
Qualified withdrawal for medical expenses are not taxable.
These are all reasons why people like HSAs for paying for healthcare and saving money for the long-run.
Rollover Rules
The difference is one of the largest is that they don’t use the funds.
FSA
Some FSAs are “use-it-or-lose-it” – meaning that money that is not spent can be lost at the end of the plan year.
Some employers do, however, provide:
Limited carryovers
Grace periods
Each employer and the IRS will have its caveats and specifics.
HSA
Now any funds in your unused HSA account will be held until they are used.
There is no annual forfeiture as well.
Investment Opportunities
One of the other great aspects of HSAs is investing.
The investments you can make in a lot of HSA providers include:
Mutual funds
ETFs
Interest-bearing accounts
Often, there’s a minimum amount of money you must have in your account in order to get investment opportunity available.
There aren’t many investment options with traditional FSAs.
Contribution Limits
The IRS also has annual contribution limits for both FSAs and HSAs.
Limits may be subject to change annually.
Be sure to check with the latest IRS limits before donating.
Qualified Medical Expenses
Both accounts will can be used for most of the following:
- Doctor appointments
- Hospital services
- Prescription medications
- Dental treatment
- Vision care
- Mental health services
- Medical devices
- Laboratory testing
Not all healthcare costs are eligible, so be sure to check with the IRS first.
A Health Savings Account Vs FSA
If you are looking for a Health Savings Account vs FSA, take your goals for the long haul into account.
Consider an “HSA” if you:
- To save up for health expenses in the future.
- Have a long-term tax bias.
- Enrolled in an eligible high deductible health plan.
You might be a good candidate for an FSA if you:
Learn to expect bills that are just as predictable as ever this year in medicine.
Desire tax cut quickly.
Be able to access via employer.
The HSA or FSA: Simply that is the question.
There’s no one right or wrong answer.
An HSA Works well for those who:
Want long-term savings.
Prefer account portability.
Want investment opportunities.
Pass qualification on an HDHP!
You might want to use an FSA if you:
Has no concerns about his/her healthcare costs for the year.
Prefer predictable spending.
Although assistance is available, do not have an HSA-qualified health plan.
Your choice will be determined by your health requirements, insurance policy and monetary targets.
How Is It If You Can Have An HSA And FSA?
One of the most common questions asked is this one.
The answer is:
Sometimes.
In general:
Contributions can not be made to an HSA during a period of coverage by a general purpose healthcare FSA that covers the same medical costs.
There are some cases, however, in which less flexible FSAs (for dental and vision would be an example) are available from some employers and would likely be eligible for an HSA if the requirements of the IRS are adhered to.
Check the eligibility criteria and coverage of health insurance with whatever FSA is being used and/or with a health insurance benefits administrator – eligibility depends on type of FSA and health insurance.
Advocating Advantages an FSA:
- Immediate tax savings
- Employer-sponsored
- Covers health care costs
- Easy payroll deductions
- Disadvantages
- Limited rollover options
- Employer ownership
- Usually not portable
- No investment growth
Advantages to an HSA.
- Triple tax benefits
- Lifetime ownership
- Annual rollover
- Investment potential
- Portable between employers
Disadvantages
Must have an HSA qualified HDHP
You might not want to be one of those who will find higher deductibles to be a good option.
Contribution limits apply
There’s a choice between an FSA and an HSA, and some tips here on how to decide:
Before enrolling, consider:
The amount of money you think you will spend on health care.
Your deductible.
If your employer provides an FSA.
Criteria for being eligible to have an HSA.
If you wish to save for the long term, make sure you read the following paragraph.
Checking out a person’s yearly health care costs could be an excellent way to determine the better accountant.
Common Misconceptions
FSA and HSA are the same.
No.
Both have tax benefits and eligibility requirements, along with their features and functionality for the account.
Renews annually.HSA Money is non-perishable per year.
False.
Money in your HSA account typically stays in your account forever unless clear out.HSA money in the account will stay in the account, unless withdrawn.
Allows Unlimited Rollover: Allows an unlimited rollover for the FSA.
False.
The vast majority of FSAs have rollover restrictions with some exceptions that allow a carryover or grace period.
FAQs
What is the difference between an HSA and FSA?
Eligibility, ownership, the rules of the rollovers and portability are the greatest differences. In order to have an HSA, you need an HSA-eligible High Deductible Health Plan (HDHP); an FSA comes from an employer. Fsa cash out funds are often subject to use it up or drop it guidelines while the funds that are in an HSA do not expire.
HSA vs. FSA – Which is best?
This is up to you. Either an HSA or an FSA could work depending on the individual’s situation—an HSA may be best for long-term savings and investment choices, whereas an FSA may be better for those persons with regular yearly healthcare costs where they do not meet the criteria for an HSA.
Is it possible to have both an HSA and FSA?
In some cases, yes. There are no general FSA plans that allow for tax-deductible contributions to the HSA, but a limited-purpose dental and vision plan may be available through your employer if it is compatible with the HSA (i.e., it excludes vision, dental and other services).
Are HSA Dollars spent?
Generally, the balances of your No. HSA roll over from year to year and you can keep them even if you change jobs or retire.
Is it tax-deductible to donate to FSA?
Typically, FSA will be paid using pre-tax wages (that is, it will decrease your taxable earnings) or through other means established by the employer. They are typically not claimed on your tax return since they already are included in taxable income.
Conclusion
It’s vital to understand the difference between FSA and HSA to choose an appropriate healthcare savings account. While both accounts provide valuable tax benefits, they also have different ownership, eligibility, rollover and long-term flexibility requirements, which means that they can also alleviate the financial burden of otherwise running up your out-of-pocket medical costs.
An HSA could have long-term value for those who are eligible for an HSA, and who feel good supporting an HSA-eligible High Deductible Health Plan with the rollover and investment options it offers. However, if someone’s medical costs are likely to be consistent over time and a tax saving advantage has been positive from employer-provided healthcare benefits then an FSA could be a great option.
Consider your health insurance policy, total annual healthcare costs, and consult your employer’s benefits data or healthcare expert before making any final choices to determine which of your healthcare options is most cost effective and suits your financial needs and requirements.
