HSA vs. FSA
- A health savings account and flexible spending account both offer tax benefits and can be used to pay medical expenses. Which is better? It depends on your employment situation, your health insurance plan, deductible limits and other considerations.
HSA vs. FSA
Healthcare costs continue to rise, and patients are expected to shoulder more of those costs through higher copayments, deductibles and coinsurance. One way to offset some of those costs is by enrolling in a government-sanctioned account that offers tax advantages on the money you spend on healthcare.
There are two primary vehicles for this:
- A health savings account, or HSA
- A flexible spending account, or FSA
These accounts have important similarities and differences that you should understand in order to choose the right strategy for you and your family.
Both an FSA and an HSA allow you to put money into the account pre-tax – meaning you don’t have to pay taxes on this money at the end of the year. You can use these accounts to pay for certain, qualified medical expenses, including deductibles, doctor's visits and prescription medication copays, expenses not covered by your healthcare insurance and more.
You are allowed to put a certain amount of money into each account each year. Thus, the amount you save is based on your tax rate – the higher your rate, the more you save.
Now let’s look at the differences.
HSA: Health Savings Account
A health savings account is an account that allows those who are enrolled in a high-deductible health insurance plan (HDHP) to make pre-tax contributions, grow these investments tax-free and use that money to pay for qualified medical expenses.
Only those enrolled in an HDHP can set up an HSA. HDHPs are determined by the government, based on minimum and maximum deductible amounts it sets each year. For example, for plan year 2022, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family.
The government also sets a limit on the amount you can contribute to your HSA. For 2022, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family coverage into an HSA.
One benefit of an HSA is that the funds in the account roll over year to year if you don't spend them. Also, the HSA funds may be invested to earn interest or other accrued value, which are not taxable. That’s why it is called a “savings account.”
Enrolling in an HSA
If you open an HSA through a private insurance plan, you are allowed to deduct the year’s contributions from your taxes when you file. If you enroll through an employer-based plan, most often you would have money withdrawn pretax from your paycheck. The HSA will have a fund manager who can invest the money so it grows in value while it is being held.
- An HDHP must be your only health insurance plan
- You must not be eligible for Medicare
- You cannot be claimed as a dependent on someone else’s tax return
Money withdrawn to pay for qualified medical expenses is tax-free, but if you use the money for non-qualified expenses, you will be charged a penalty tax.
FSA: Flexible Spending Account
A health flexible spending account, or FSA, is funded by pre-tax dollars taken from a paycheck that can be used to pay for qualified medical expenses. It can be used with any type of health insurance. (There are also flexible spending accounts for services like dependent adult or childcare.)
Money in an FSA is not invested, so it does not gain value over time. That’s why it’s called a “spending account.” But you can use the full value of the amount you select to fund the account on day one, even though you haven’t paid fully into the account yet.
There are limits to how much you can put into your FSA. In 2021, the limit was $2,750. Unlike an HSA, there are also limits to how much you can roll over if you don’t use it. In 2021, the limit was $550. If you don’t use more than that, you lose it.
If you change jobs, you cannot take the FSA account with you. You will have to set up a new account with your new employer.
Enrolling in an FSA
You can only enroll in an employer-sponsored FSA. This typically happens during the annual Open Enrollment period, in October and November. You cannot change your contribution until the next Open Enrollment.
The major differences between an HSA and an FSA are:
- Who qualifies. Only those in high-deductible health care plans or self-employed, self-insured workers can open an HSA. Employees with other types of health insurance can qualify for a health FSA, if it's offered by the employer. Self-employed workers cannot open an FSA.
- When the money runs out. HSA funds can grow, tax-free, for as long as they are invested. FSA funds expire at the end of the year (minus any allowable carry-over amounts).
- Annual limits. Both plans limit the amount of money you can put into the account. However, you can change how much you contribute to an HSA any time during the year. You can change FSA contributions only at Open Enrollment or during certain Special Enrollment periods, like when your employment or family circumstances change.
- Employment restrictions. You retain your HSA account even when you change employers or lose employment. You can continue to contribute as long as maintain coverage through an HDHP. Your FSA is tied to your employer.
Which Is Better?
Choosing to enroll in either an HSA or FSA depends mostly on your health insurance coverage and your expected healthcare costs.
Most experts suggest that people who are young, generally healthy, have a steady income and expect low healthcare expenses should consider enrolling in a high-deductible health plan (which has the lowest premiums) and an HSA. They can expect to have lower health costs, and an HSA gives them more flexibility, tax-free investment growth and the ability to carry their HSA account with them wherever they are employed.
However, an HDHP generally is not recommended for older workers, families or anyone who expects moderate to high medical costs. The high deductibles are usually not worth the lower premiums. Therefore, they are not eligible for an HSA and should consider an FSA to lower their costs over the year.
It’s always wise to talk to a healthcare benefits professional to make the best choice for you and your family.