HSAs vs. FSAs: Everything You Need to Know
Are you looking for new ways to stretch your budget and save on taxes? If so, consider taking advantage of the health savings and/or spending accounts that may be provided by your employer. These tools offer potential tax advantages and savings opportunities.
While Health Savings Accounts (HSAs) and Flexible Savings Accounts (FSAs) share some common features, they also differ in important ways.
Below is an HSA and FSA primer that covers the differences between the two and how each can best be used to meet your needs.
What are HSAs and FSAs?
Both HSAs and FSAs function similiar to personal savings accounts that can be used for certain healthcare costs. They can be used to set aside funds to pay for out-of-pocket medical expenses by you, your partner, and/or dependents. You can determine the amount you want to contribute to your account each year, but limits apply (see table below). Employers may also choose to contribute to your account but aren't required to do so.
HSAs and FSAs also offer some pretty robust tax advantages. Contributions made to an employer-sponsored account can be funded with pre-tax dollars via payroll deductions, which reduce your tax bill and boost take-home pay. Plus, withdrawals used for approved medical expenses¹—such as doctor visits, dental procedures and most prescriptions,—are tax-free.
Besides the noticeable similarities, there are quite a few differences when it comes to HSAs and FSAs. In order to open an HSA, you must meet four criteria²:
- You are enrolled in a high deductible health (HDHP) insurance plan (see table below).
- You have no other health coverages except for those permitted by the IRS.
- You are not enrolled in Medicare.
- You can’t be claimed as a dependent on another person’s tax return.
With HSAs, your contributions can be put in a variety of investments, and any gains or interest earned on the money can grow, tax-deferred, simlilar to an IRA or 401(k) plan.
What’s more, unlike FSAs, which typically require you to spend all accumulated savings year-to-year, HSA funds never “expire” and if you leave your job or retire, your account can go with you.
If, however, you don’t meet the eligibility requirements of the HSA, an FSA may be a good substitute. Aside from the money-saving features, FSAs offer flexibility in design that makes them an attractive option for a range of uses.
In addition to the health care FSA, your employer may offer the following variations of FSAs:
- Dependent Care FSA: Use pre-tax contributions to pay for daycare, preschool, day camp, elder care, or other dependent care so you can work, look for work, or attend school full time.
- Limited Purpose FSA: Use this FSA to pay for eligible out-of-pocket vision and dental expenses.
- Commuter FSA: Use pre-tax contributions to offset work-related transportation and parking costs.
You can ask your employer whether any of these additional types of FSAs are available to you.
What are the differences between HSAs and FSAs?
Must be enrolled in a high-deductible health insurance plan (HDHP). In 2019, an HDHP is a plan that carries a minimum deductible of:
Maximum out of pocket expenses (including deductibles, co-payments, and other amounts, but not premiums) of:
You need to be employed by a company that offers one (or more) FSA plans. Self-employed individuals do not qualify.
|FSA (Health and Limited Purpose)|
|You own the account. If you leave your job, change insurance plans, or retire, your HSA dollars go with you.||Your employer sets up and owns the account.|
“Use it or lose it?”
|You can invest unused HSA funds just as you would an IRA. All earnings are tax-deferred. Typically a minimum balance is required to invest HSA funds.||You cannot invest the unused funds in an FSA and your money does not earn interest.|
HSAs vs. FSAs: At-a-Glance Comparison (graphic)
|You own the account||X|
|Employer owns the account||X|
|Must be enrolled in HDHP||X|
|You and employer can make contributions||X||X|
|Contributions are made pre-tax; withdrawals typically tax-free||X||X|
|"Use it or lose it"||X|
Should I have an HSA, FSA, or both?
If you meet all the eligibility rules, an HSA is generally considered the stronger option. HSAs have higher contribution limits, no “use it or lose it” provision, and can continue to grow tax-deferred well into the future.
While the IRS is clear in its rule about not allowing you to own both an HSA and an FSA at the same time, it does make an exception for the Limited Purpose Health FSA. When used in conjunction with an HSA, a Limited Purpose Health FSA gives you the option to:
- Spend down your HSA and still have funds to draw on for additional health expenses.
- Choose which account to draw from, depending on the expense.
- Let the HSA stay intact and continue to grow for the future.
In addition, if your employer offers Dependent Care and Commuter FSAs, you may be able to couple these plans with an HSA.
Choosing between an HSA or an FSA is a win-win decision for you and your family. To learn more about the many options available through Voya, visit our product page and/or contact your company’s benefits administrator.
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