Flexible Spending Accounts, (FSA) and Health Savings Accounts (HSA) are both tax-advantaged accounts that allow you the opportunity to save money for future medical expenses. However, they have several key differences, restrictions, and benefits.
This easy-to-understand guide explains the two accounts side by side so you can decide which one is best for you.
Flexible Spending Accounts (FSAs):
These accounts are established by an employer and are funded by a pre-tax payroll deduction. Some employers can also contribute, some do not. Contribution limits are $2,650 (as of 2017) and the balance is treated like a credit card. You designate your contribution amount at the beginning of the year and the full amount is available immediately while you continue to make monthly payments towards your contribution. This can be an add-on to any type of health insurance. You can use the funds to cover any qualified medical expenses. If you don’t use your funds by the end of the year, you forfeit them.
Health Savings Accounts (HSAs):
This account can be established by an employer or by an individual, but is only available only in conjunction with an HSA-qualified high deductible health plan (HDHP). The account is funded through pre-tax payroll deductions, or by individual or employer contributions. The maximum contribution is $3,450 for an individual or $6,850 for a family. The funds in an HSA work like a debit card. You can only spend what is in the account. The unused balance rolls over year to year and stays with the employee no matter what, even if they quit their job.
So, what’s the difference?
Both funds provide a tax-free way to save for medical costs. The biggest difference is eligibility. If you don’t have a high deductible health insurance plan, you’re not eligible for an HSA. Other key differences include:
|Contribution Max:||$2,650||$3,450 / individual|
|Rollover:||Use it or lose it||Balance rolls over year to year|
|Cash Availability:||Full amount available at the beginning of the year||Balance available as you contribute.|
|Connection to employer:||You lose it if you change jobs||The account balance remains yours, regardless of employment.|
|Eligibility||Anyone is eligible||Must have a high-deductible health insurance plan.|
Can I do both?
Probably not. There are special “limited purpose” FSA accounts you may be eligible for if you have an existing HSA, but they can only be used for vision and dental, and are only used if you have high medical costs throughout the year.
Which is best?
Most often, you decide which is best. If you qualify for an HSA, take it. The limits are higher and you can carry over the contributions from year to year. If you don’t qualify for an HSA, the FSA can still be a great way to cover unexpected medical costs or plan for future treatments.