Flexible Spending Account vs. Health Savings Account: What's the Difference?
By Indeed Editorial Team
Updated November 8, 2022 | Published March 20, 2020
Updated November 8, 2022
Published March 20, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Flexible savings accounts (FSAs) and health savings accounts (HSAs) help you to save money throughout the year on medical expenses. Each type of account has benefits and drawbacks that you may need to consider before choosing the one that is right for you. In this article, we discuss what each account type is, their differences, their benefits and how to choose between an FSA and an HSA.
What is a flexible spending account?
A flexible spending account, or FSA, is a benefit employers may offer that can be used for certain medical expenses, such as doctor's visits, medical procedures and diagnostic testing. FSAs may also be used for dental, vision and childcare expenses. Your employer deducts the money you contribute to your FSA account from your paycheck in increments before the government takes your taxes out, although these accounts typically have money in them when you enroll for the benefit during the open enrollment period at your job. This means that your account is pre-funded and ready to use at the beginning of the year after you select the full contribution amount.
Most companies have a "use it or lose it" policy for FSAs, which means you lose any amount you didn't spend at the end of the year. Some companies have a rollover option that allows you to carry money over into the next plan year, but the IRS limits this amount to $500 or less.
What is a health savings account?
A health savings account, or HSA, is an account used for qualified health expenses available to individuals who have high-deductible health plans. Not all HDHPs qualify for HSAs, and you may need to check with your insurer to see if you qualify for one.
The government determines what qualifies as the minimum deductible for high-deductible plans each year. They also assess how much you may contribute to an HSA each year.
Employers and private insurance companies may offer HSAs, and each year's contributions are something you may deduct from your taxes. Employers typically deduct the amount for you, but if you have private insurance you may need to deduct the contributions you made to your HSA yourself when you file your taxes.
Differences between FSAs and HSAs
FSAs and HSAs have a few differences that distinguish them from one another. You can determine these differences by considering the following factors:
Contribution limit: HSAs offer higher contribution limits and provide families with the option to add more money. FSAs offer lower contribution limits, and there are no options for families to add more money.
Rollover: Unused balances may continue and roll over into the next benefit period for HSAs. Most FSAs do not allow rollover, which means you give up any unused money at the end of the year.
Changing contribution amount: HSAs allow you to change the amount you contribute throughout the year.
Eligibility requirements: You must have a high-deductible health plan to qualify for an HSA. Your employer must offer an FSA to take advantage of the benefits of it.
Effect on taxes: Your HSA contributions are tax-deductible or can be taken out pre-tax. The growth and distribution of HSAs are also tax-free. Contributions you make to an FSA account are also pre-tax, and distributions aren't taxed.
Connection to the employer: HSA accounts move with you when you change jobs, and you may have an HSA even if you are unemployed. You lose your FSA account if you change jobs unless you're eligible to continue it with your COBRA plan.
Benefits of FSAs and HSAs
Entering into FSA or HSA plans offer different benefits.
The advantages of an FSA include that it:
Increases take-home pay: FSAs allow you to save on taxes, which means they can increase how much money you take home during the year.
Lowers taxable income: FSAs lower your taxable income because your employer typically takes out your contribution through payroll deductions.
Funds are available right away: The amount you pledge to contribute to your FSA is available as soon as your new benefit period begins.
Benefits of an HSA include that it:
Includes annual rollover: You don't need to use all the money you contributed to an HSA by the end of the year. The amount rolls over so you can focus on long-term savings.
Allows others to contribute: Contributions to your HSA may come from your employer, you, a family member or anyone else who wants to contribute to your HSA account. The IRS has limits on how much someone may contribute to your HSA.
Many expenses are eligible: There is a wide range of medical and dental expenses eligible for coverage by your HSA.
How to choose between an FSA and an HSA
You can use these steps to choose between an FSA and an HSA:
Consider your healthcare-related expenses from the previous year.
Calculate your estimated expenses for the upcoming year.
Determine what your long-term medical expenses are.
Select the account that reduces your out-of-pocket costs.
1. Consider your healthcare-related expenses from the previous year
Assess your general health and how much you spent on doctors' visits and medications in the previous year to help you determine if you need lower deductibles or if high-deductible health plans are acceptable to you. Individuals who typically spend less money on prescriptions and other health expenses may do well with an HDHP and HSA because HDHPs are cheaper health plans and HSAs can help cover some expenses that the insurance won't cover, if necessary.
2. Calculate your estimated health expenses for the upcoming year
If you know you or one of your dependents on your health insurance plan needs surgery or has another medical procedure coming up, you may consider which account helps you pay the maximum amount of out-of-pocket expenses.
Health expenses are not always something you can plan for, but calculating your annual health expenses is mostly about what fits into your financial plan and what benefits your situation the best.
Related: Guide to Unemployment Benefits
3. Determine what your long-term medical expenses are
Identify any long-term medical expenses you may have, such as having a baby, getting orthodontic treatments or other expensive medical procedures that you have planned for in the future. If you are expecting upcoming or long-term medical expenses, you may want to use an HSA, since HSAs roll over money for long-term savings that you can use for procedures.
4. Select the account that reduces your out-of-pocket costs
FSAs offer less flexibility, and HSAs must be used with HDHPs. Both accounts have pros and cons, and the account you choose ultimately depends on your specific needs. A good practice to adopt is to contribute an amount to your FSA or HSA that covers your basic health expenses, such as medication costs and expected doctor visits.
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