What Does FSA and HSA Stand For? Key Differences

Healthcare costs are a substantial financial consideration for many individuals and families. Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are widely utilized savings vehicles. They help manage expenses and offer tax advantages by providing a structured way to pay for qualified medical costs while potentially reducing taxable income. Understanding their specific features assists in making informed healthcare financial decisions.

Flexible Spending Accounts Explained

A Flexible Spending Account (FSA) allows employees to set aside pre-tax money from their paycheck to cover eligible healthcare expenses. These accounts are employer-sponsored, meaning an employer must offer the program for an individual to participate. Funds contributed are exempt from federal income, Social Security, and Medicare taxes, leading to immediate tax savings.

A defining characteristic of an FSA is the “use-it-or-lose-it” rule, which generally requires funds to be spent by the end of the plan year or forfeited. However, employers may offer options to mitigate this rule, such as a grace period of up to 2.5 months or a limited carryover of unused funds into the next year. For 2024, the IRS allows a maximum carryover of $640, and the annual employee contribution limit is $3,200.

Health Savings Accounts Explained

A Health Savings Account (HSA) is a tax-advantaged savings and investment account designed to help individuals save and pay for qualified medical expenses. A primary requirement for contributing to an HSA is enrollment in a High Deductible Health Plan (HDHP). These accounts are individually owned, meaning the account belongs to the individual and remains with them even if they change jobs or health plans.

HSA funds roll over year after year without limit, accumulating and potentially growing through investment options. HSAs offer a triple tax advantage: contributions are often tax-deductible or made pre-tax, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.

For 2024, the maximum contribution for self-only HDHP coverage is $4,150, and for family HDHP coverage, it is $8,300, with an additional $1,000 catch-up contribution for those aged 55 and over. To qualify as an HDHP for 2024, a plan must have a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage, and annual out-of-pocket expenses cannot exceed $8,050 for self-only coverage or $16,100 for family coverage.

Comparing FSAs and HSAs

Eligibility criteria present a fundamental difference. FSAs are sponsored by employers and are generally available to employees regardless of their health plan type, while HSAs require individuals to be enrolled in a High Deductible Health Plan (HDHP).

Account ownership and portability also vary significantly. An FSA is owned by the employer, and funds typically do not move with an individual if they change jobs. In contrast, an HSA is individually owned, providing full portability of the funds, which remain with the account holder even when changing employment or health insurance providers.

The handling of unused funds highlights another key difference. FSAs are subject to the “use-it-or-lose-it” rule, although some plans allow for a limited grace period or carryover amount. HSAs, however, permit all unused funds to roll over indefinitely from year to year, allowing for long-term savings growth. This long-term accumulation potential in HSAs is further enhanced by the ability to invest the funds, a feature generally not available with FSAs.

Regarding tax advantages, both accounts offer benefits, but the scope differs. FSA contributions are made pre-tax, reducing taxable income, and withdrawals for qualified expenses are tax-free. HSAs provide a broader “triple tax advantage” with pre-tax contributions, tax-free growth on investments, and tax-free withdrawals for qualified medical expenses.