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What's the Difference Between an FSA and HSA?
Flexible spending accounts are owned by an employer and are less flexible in comparison to health savings accounts, which are controlled by the individual and allow yearly contributions to roll over. Find out more about the differences and which account would work best for you.
What's the Difference Between an FSA and HSA?
by Madison Miller
updated Mar 16, 2022
The most significant difference between flexible spending accounts (FSA) and health savings accounts (HSA) is that an individual controls an HSA and allows contributions to roll over, while FSAs are less flexible and are owned by an employer. This means that if you left your job, the funds in your FSA may be forfeited while any funds in your HSA are yours to keep (and rollover into another HSA account). Both FSAs and HSAs allow people to save for their medical expenses on a tax-advantaged basis by using pretax money to pay for qualified medical costs.
Differences Between FSA and HSA
HSA: More Qualifications
FSA: Less Flexibility, Lower Contribution Amounts
Funds Roll Over Using an HSA
FSA vs HSA: Which is Better?
Can You Use Both an FSA and HSA?
Differences Between FSA and HSA
Although FSAs and HSAs both allow people to use pretax income for eligible medical expenses, there are considerable differences between the two account types. These include the qualifications, contributions limits, rules for rollovers and changing contribution amounts, and withdrawal penalties. We have compiled the main differences in the chart below.
Flexible Spending Account
Health Savings Account
Must be set up by employer.
Requires a high-deductible health plan (HDHP).
Cannot be eligible for Medicare.
Cannot be claimed as a dependent on another person's tax return.
Annual Contribution Limits
Up to $2,650 individual.
Up to $5,300 per household.
Up to $3,450 individual.*
Up to $6,900 per household.
Owned by employer and lost with job change, unless eligible for continuation through COBRA.
Owned by individual and carries over with employment changes.
Rollover Rules Employer chooses whether:
Funds expire at the end of the year.
Employees get a grace period of 2 1/2 months to use funds.
Employees can roll over $500 into next year's FSA.
Unused funds roll over every year.
When You Can Change Contributions
At open enrollment.
If your family situation changes.
If you change your plan or employer.
Any time, as long as you don't go over the contribution limits.
Penalties for Withdrawing Funds
May have to submit expenses to be reimbursed by FSA.
Depending on employer, employees may not have access to funds for nonmedical expenses.
Savings can be taken out of the account tax-free after age 65.
If used before 65, for nonmedical expenses, it is subject to a 20% penalty and must be declared on income tax form.
*If you are 55 or older, you can make "catch-up" contributions, which add $1,000 per year to your HSA contribution limit.
More Qualifications to Set Up an HSA vs FSA
Compared to an FSA, HSAs have more restrictions to qualify. In order to be eligible for an HSA, you will need to have a high-deductible health plan (HDHP) of more than $1,350 as an individual or more than $2,700 as a family. The HDHP must be your only health care plan. In addition, you cannot open an HSA if you're eligible for Medicare or claimed as a dependent on another person's tax return.
In contrast, an FSA must be set up by an employer, meaning that self-employed and unemployed individuals aren't eligible. Business owners are only allowed to contribute to an FSA if they own less than 2% of a company that is an LLC, PC, sole proprietorship, partnership, or S-corporation, or if they own a C-corporation. If an employer does have an FSA set up, there are no eligibility requirements: The FSA is available to any employee, even those without a health plan.
Unlike FSAs, HSAs are available to self-employed individuals as long as they have an HDHP. Not many people prefer to have a high-deductible plan, which requires you to pay more before insurance covers the cost of medical expenses. Additionally, not all plans with deductibles up to the minimum will qualify for an HSA, so you must check with your insurance provider as to whether your health plan is covered and eligible for an HSA.
FSA: Less Flexibility with Lower Contribution Amounts
Flexible spending accounts allow individuals and families to contribute up to $2,650 and $5,300 respectively. Meanwhile, HSAs allow individuals to put in $800 more than an FSA allows and $1,600 more for households. If an employee doesn't have many medical expenses, the FSA will be enough, but the HSA's higher contribution limit may be appropriate for those with more medical costs.
Unlike an FSA, HSAs can follow you to a new employer because the account belongs to you. FSAs belong to the employer, so unless you qualify for a continuation through the Consolidated Omnibus Budget Reconciliation Act (COBRA), you won't have access to your FSA if you leave your place of employment.
Funds Roll Over Using an HSA
One of the biggest benefits of a health savings account is that the contributed funds roll over, meaning that there are no time limits to using the money in the account. The account belongs to the individual rather than an employer, so the individual gets to decide what happens to the unused funds.
In an FSA, unused funds are not automatically carried over to the next year's plan. Moreover, unused FSA funds belong to the employer and not the employee. Employers that subscribe to an FSA can choose one of three options for its employees:
Healthcare FSA Vs. HSA—Understanding The Differences – Forbes Advisor
A healthcare FSA and an HSA, or health savings account, both offer you tax-advantaged savings for qualified medical expenses. Learn their major differences.
Healthcare FSA Vs. HSA—Understanding The Differences
Forbes Advisor Staff
Updated: Jul 19, 2021, 7:00am
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Both a healthcare flexible spending account (FSA) and a health savings account (HSA) can cut your taxes and help you save money on medical, dental, vision and other qualified medical expenses. And while they are alike in some ways, each offers different features and benefits.
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Here is what you need to know about an FSA and an HSA and how to determine which one may work best for you.
What Is a Flexible Spending Account (FSA)?
An FSA is a great tax savings tool to effectively pay for qualified out-of-pocket healthcare expenses. It is a tax-advantaged savings account established by your employer that allows you to stash money away for yourself, your spouse or dependents.
For starters, since you can only establish an FSA with your employer, it means your employer owns your FSA account. If you separate from your job, you would forfeit your FSA funds. For 2021, you can contribute up to $2,750 into a healthcare FSA and your employer may also contribute on your behalf. However, the IRS does not require your employer to do so.
Advantages of an FSA
One great advantage about an FSA is that your funds are immediately made available the day you enroll. For example, if you decide on Jan. 1 to contribute $2,400 annually with monthly pretax contributions of $200, you will have access to the entire $2,400 at the start of the year. This means if you have a qualified medical expense of $1,500 but your FSA account does not have the entire funds to cover it, your FSA administrator will still pay the entire claim.
And while that is great news, there are some disadvantages to an FSA.
Disadvantages of an FSA
The primary disadvantage is that, typically, most FSA accounts have a “use or lose it” feature, which means you need to spend all of your FSA funds before the end of the plan’s year. If you fail to do so, you will forfeit your FSA funds. Some employers may elect one of two features that can provide some flexibility with unused funds. These features include an extended grace period or a rollover provision.
An extended grace period allows you an additional 2.5 months to spend your FSA funds. If your employer has this feature, you will have until March 15 of the following year to spend your FSA funds. This deadline may differ if your employer’s administrator plan does not follow a calendar year; instead, you will have an additional 2.5 months following the plan’s year-end date.
In December 2020, then-President Donald Trump signed the Consolidated Appropriations Act of 2021 into law, which allows employers to alter their current FSA plans. These changes may:
Allow you to carry over unused funds—in excess of the usual $550 limit—from both the 2020 and 2021 plan years to the next year, or
Extend the grace period to up to 12 months after the plan year for both the 2020 and 2021 plan years
What Is a Health Savings Account (HSA)?
Similar to an FSA, an HSA also allows you to stash money away into a pretax account but works a little differently. Unlike an FSA, to contribute to an HSA you must qualify and meet the following requirements:
You are not claimed as a dependent on anyone else’s tax return.
You are not enrolled in Medicare.
You are covered under a high deductible health plan (HDHP).
An HDHP is any healthcare insurance plan with a high deductible amount. For 2021, the minimum deductible amount for an individual HDHP is $1,400 and $2,800 for a family plan. Unlike an FSA, you own your HSA account and therefore it is portable, which means that if you separate from your employer, you can take your HSA funds with you.
You can also establish an HSA either independently or with your employer. If you have an employer-sponsored HSA account, the amounts you contribute are not subject to payroll or income taxes. However, if you set up your HSA account on your own, you can deduct your HSA contributions on your federal income tax return. You qualify for the tax deduction whether you elect to itemize your deductions or not.
But keep in mind, the IRS limits the amount you can contribute to an HSA.
2021 Contribution Limits
For 2021, you can contribute up to $3,600 if you have self-only HDHP coverage ($7,200 for family HDHP coverage). These limits include both employee and employer contributions. The IRS allows you more time to contribute to an HSA account than an FSA account. You or your employer can contribute in the current plan year or up to the due date of your tax return. For example, you can make 2021 HSA contributions until April 15, 2022, which is the tax deadline for your federal tax return.
Unlike FSAs, where you have a restriction on the time you can use your funds or a limited amount to roll over, an HSA is different. In the event you do not use your funds before the end of your plan year, you will not lose them. Your unused HSA funds are eligible to roll over each year without any limitations or restrictions.
HSA vs. FSA: What is the Difference Between Them?
Learned the basics of tax-advantaged Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). The see how different life circumstances and financial goals influence people just like you's choice of a health care account.
HSA vs. FSA: What's the difference?
If you watched the video above, you’ve learned the basics of tax-advantaged Flexible Spending Accounts and Health Savings Accounts. Below, the stories of Maxine, Phil and Sally show you how different life circumstances and financial goals influence someone’s choice of a health care account.
FSA: A mom budgets for her family’s health care.
Maxine, 34, is a working mom living in Jacksonville, Florida. With her two kids out of the house in the mornings, Maxine has time for a run before starting her work day. The regular exercise makes her feel strong and clear-headed, but a nagging pain in her hip needs professional attention. There are other health concerns in Maxine's household. Her toddler frequently picks up viruses at daycare, leading to fevers and ear infections. Maxine’s husband, George, has bad allergies that require regular shots to ease his symptoms.
Given the family's many doctor visits, Maxine opted for a low-deductible health plan. This means that she is eligible for a flexible spending account, or FSA, because only those with high-deductible health plans (HDHPs) qualify for HSAs. As an FSA member, Maxine can get medical expenses reimbursed based on what she plans to contribute to her account for the year, rather than what’s already been deducted from her paycheck. Maxine commits to contributing $2600, or $100 per paycheck. Because the account is funded with pre-tax money, she’ll save about 30 cents on the dollar on all eligible health bills: That’s about $780 this year alone.
Maxine will use her FSA to cover costs related to treating her aching hip, George’s allergies and their kids’ pediatrician visits. Toward the end of the year, if she still has FSA funds remaining, she can stock up on supplies she knows her family will use, from bandages to a heating pad. Juggling work and fitness isn’t easy, but Maxine is happy that her FSA helps her save serious money.
HSA: A young man plans for the future.
Phil, 25, is a single guy living in Raleigh, North Carolina. He loves his job as a programmer for a gaming start-up but his real passion is hosting dinner parties for friends. His homemade dishes are chock full of fresh veggies, helping Phil stay healthy. In fact, the only time he visits his doctor is for preventive care, such as annual check-ups and flu shots. Phil chooses a low-cost, high-deductible health plan because he assumes he'll have very few health expenses over the coming year. This means he is eligible for either an HSA or an FSA.
He goes for an HSA because the money he saves can be rolled over year after year. He signs up to contribute $1000 for the year, or $39 per paycheck. As Phil gets older or if he starts a family, he will find the cash accumulated in his HSA very useful. And there’s an additional benefit: HSA plans often give you the option of investing your funds, which earn profits tax-free. With an eye on the future, Phil knows that an HSA is the right choice.
Find out more about HSAs and eligible health expenses.
FSA and HSA: A savvy woman maximizes her savings.
Sally, 49, is single and runs a successful engineering firm in Philadelphia. Sally wears glasses with a strong prescription and recently learned she would need some dental work. Otherwise, her health is excellent and she rarely visits the doctor.
Sally expects that she won't meet her health plan deductible in the coming year, though she is certain she'll use vision and dental services. With this in mind, Sally signs up for vision and dental plans, as well as a high-deductible health plan. Her HDHP makes her eligible for an HSA, but Sally can also take advantage of something else: a type of FSA known as a Limited Purpose FSA (LPFSA.) These accounts work like regular FSAs, but funds can only be used for vision and dental expenses. Sally plans to contribute pre-tax dollars to both an LPFSA and an HSA, maximizing her savings. Her HSA money will accumulate over time and be available to use on medical expenses she incurs in later years, even in retirement.
Find out how seeing an eye doctor can be good for your overall health.
HRA: A new employee gets an unexpected bonus.
A few months ago, Mateo, 55, started working for a restaurant chain based in Houston, Texas. Mateo has a bad back, which he treats with regular chiropractic visits. When reviewing his health benefits, he got a pleasant surprise: His package includes a Health Reimbursement Arrangement (HRA) funded with $3,000.
Similar to other health savings accounts, HRAs can be used toward eligible out-of-pocket medical expenses. Mateo estimates that his funds will cover his annual chiropractor costs, with some left over to cover part of his deductible. He’s grateful for this unexpected windfall, and plans to contribute the money he saves on out-of-pocket medical fees to his retirement savings.
Unlike FSAs and HSAs, only your employer may contribute money to your HRA account. Mateo’s funds are available immediately, and his company allows unused dollars to be carried over from year to year. However, if he leaves his job or changes his health plan, his HRA can’t come with him. Any amount left in the account is returned to his employer. That’s fine by Mateo, who hopes to stick with this company for the long term.
Key takeaways about HSAs and FSAs.
Both accounts offer tax benefits and have annual contribution limits.