FSA vs. HSA: What They Are and What’s the Difference
Understand the core differences between FSAs and HSAs to optimize your healthcare savings and manage medical expenses effectively.
Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are two prominent tax-advantaged options designed to help individuals manage healthcare costs. This article clarifies the fundamental aspects of both FSAs and HSAs, outlining their structures and distinguishing features. Understanding these accounts can help individuals assess which option, or combination of options, might best suit their healthcare and financial needs.
Flexible Spending Accounts (FSAs)
A Flexible Spending Account (FSA) is an employer-sponsored benefit allowing employees to set aside pre-tax money for eligible healthcare expenses. Employees elect an annual contribution, deducted from paychecks in installments. This pre-tax contribution reduces an individual’s taxable income, leading to tax savings on federal income taxes, and often state and local taxes, as well as Social Security and Medicare taxes.
The Internal Revenue Service (IRS) sets annual contribution limits for FSAs. For 2024, the limit for health FSAs is $3,200. If both spouses have access to an FSA through their employers, each can contribute up to this limit.
FSAs are subject to a “use-it-or-lose-it” rule, meaning unspent funds are generally forfeited at year-end. Employers may offer exceptions: a grace period of up to 2.5 months, allowing additional time to incur and pay for expenses, or a limited carryover. For 2024, the maximum carryover is $640. Employers can offer one exception, but not both.
Qualified medical expenses that can be paid with FSA funds are broadly defined and include deductibles, co-payments, prescriptions, and dental and vision care. Funds are accessed via a debit card or by submitting receipts for reimbursement. Since the employer owns the FSA, the account is generally not portable.
Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed to be used in conjunction with a High-Deductible Health Plan (HDHP). Unlike FSAs, HSAs are owned by the individual, providing flexibility and portability. They offer a “triple tax advantage”: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Eligibility for an HSA requires coverage under an HDHP and generally no other non-HDHP health coverage. For 2024, an HDHP has a minimum annual deductible of $1,600 for self-only coverage or $3,200 for family coverage. Annual out-of-pocket expenses cannot exceed $8,050 for self-only coverage or $16,100 for family coverage.
Contributions to an HSA can come from the individual, an employer, or both, up to IRS annual limits. For 2024, the maximum is $4,150 for self-only HDHP coverage and $8,300 for family coverage. Individuals age 55 and over can contribute an additional $1,000 annually as a “catch-up” contribution. Contributions are tax-deductible, even without itemizing.
HSA funds can be invested in various options, such as mutual funds, allowing tax-free growth similar to a retirement account. Since the individual owns the HSA, the account is fully portable, remaining with them regardless of employment changes. Qualified medical expenses for HSA withdrawals are similar to those for FSAs, including doctor visits, prescriptions, and dental and vision care. After age 65, funds can be withdrawn for any purpose without penalty, though they are taxed if not used for qualified medical expenses.
Key Distinctions Between FSAs and HSAs
The key distinctions between Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) involve eligibility, ownership, and long-term utility. FSA eligibility is tied to employment and does not require a specific health plan. HSA eligibility, however, requires enrollment in a High-Deductible Health Plan (HDHP).
Account ownership is another key difference. An FSA is employer-owned, making funds generally non-portable upon job change. An HSA is individually owned, ensuring full portability regardless of employment status.
The ability to roll over unused funds is a significant difference. While FSAs are subject to a “use-it-or-lose-it” rule with limited exceptions, HSA funds completely roll over year to year without expiration. This perpetual rollover allows HSAs to function as a long-term savings and investment vehicle.
FSAs do not offer investment options, while HSAs allow funds to be invested for tax-free growth. Both accounts offer tax advantages through pre-tax contributions. However, HSAs provide a “triple tax advantage” with tax-free growth and withdrawals for qualified medical expenses, and penalty-free withdrawals after age 65 (taxable if not medical). Employer contributions are possible for both, but HSA contributions can also come from any individual. These distinctions highlight that FSAs are primarily for short-term medical expenses, while HSAs serve as both spending and long-term savings and investment accounts.