HSA vs FSA—What’s the Difference?

Health Care Spending vs Flexible Spending Accounts

Weighing the differences between an HSA and a FSA
What are the differences between an HSA and an FSA?. David Malan/Getty Images

Health Savings Accounts and Flexible Spending Accounts help you lower your income taxes while saving money to use for medical expenses. However, the similarities stop there. What should you know about the differences between an HSA and an FSA so you can choose the option which is best for you? What are the advantages and disadvantages of these plans?

Differences Between an HSA and FSA

There are many differences between an HSA and an FSA, and without looking at these closely you might feel confused.

Let's look at some of the most important differences.

HSAs & FSAs Differ on Who Owns the Account

When you start a Flexible Spending Account (FSA), you don’t actually own the account; your employer does. You can’t take it with you. In some cases, you even forfeit the money in it—money you contributed from your paychecks—to your employer. This can occur whether you leave your job voluntarily or are let go.

When you open a Health Savings Account (HSA), you own the account and all of the money in it. You take it with you when you move, change jobs, and even if you lose your health insurance.

Spending Vs Saving

Flexible Spending Accounts are structured to encourage you to spend most or all of the money in it. Health Savings Accounts, on the other hand, are structured to encourage you to save.

You can’t invest the money set aside in an FSA, so you won’t be earning interest on it. Even worse, you forfeit unspent funds to your employer at the end of the year; it’s use it or lose it.

Employers are allowed to roll over up to $500 of your unspent funds into your FSA for next year, but they’re not obligated to do so. Anything more than $500 left unspent in your account at the end of the year disappears into your employer’s coffers.

On the other hand, you can go as many years as you like without spending a dime of the money in your HSA, and, unlike an FSA, the money will still be there.

Your employer can’t touch it. There’s no end-of-the-year deadline to use it or lose it.

Instead of just sitting in your account doing nothing, you may invest the money in your HSA. Interest and earnings grow tax-deferred. You don’t pay taxes on earnings or contributions when you withdraw them if you use them for qualified medical expenses.

Eligibility Requirements Differ Between an FSA & HSA

To participate in an FSA, you must have a job with an employer who offers an FSA. The employer decides the eligibility rules. The account is linked to your job.

To participate in an HSA, you must have a qualified High Deductible Health Plan or HDHP. If you’re on Medicare, you’re not eligible to start an HSA. If you have a more traditional health insurance policy, either in addition to your HDHP or instead of an HDHP, you’re not eligible. If someone else can claim you as a dependent on their tax return, you’re not eligible, even if they don’t actually claim you.

If you have an FSA, you’re not eligible to start an HSA unless your FSA is a Limited Purpose Flexible Spending Account. These special FSAs can only be used to pay for vision and dental expenses. If you have an FSA and you’d like to start an HSA, you have two options: check with your employer to see if your FSA is a Limited Purpose FSA, or wait until the next year and get rid of the FSA.

The HSA is designed to help you cope with the high deductibles associated with HDHP health insurance plans. Although the start of your HSA might be associated with your job, the account isn’t linked to your job; it’s linked to your HDHP health insurance. In fact, you don’t even have to have a job to start an HSA.

What Happens to Your Account When You Lose Your Job Differs

If you lose your job, you generally lose your FSA and the money in it. You can’t even use your FSA money to pay your COBRA health insurance premiums

In contrast, when you lose your job, you keep your HSA and all of the funds in it.

If you lose your HDHP health insurance along with your job, you won’t be allowed to contribute any more funds to your HSA until you get another HDHP health plan. However, you may still withdraw funds to spend on eligible medical expenses, even if you no longer have an HDHP. In fact, you may even use your HSA funds to pay your COBRA health insurance premiums or to pay health insurance premiums if you’re receiving government unemployment benefits.

Who Can Contribute to an FSA vs HSA

With an FSA, only you or your employer may contribute, and many employers choose not to. FSA contributions are generally made by pre-tax payroll deductions, and you must commit to having a specific amount taken from each paycheck for the entire year. Once you’ve made the financial commitment, you’re not allowed to change it until the next open enrollment period.

With an HSA, you’re not locked into an entire year of contributions. You can change your contribution amount if you choose to. Anyone can contribute to your HSA: your employer, you, your parents, your ex-spouse, anyone.  However, the contributions from all sources combined can’t be more than the yearly maximum limit set by the IRS.

You Can Contribute More to an HSA Than an FSA

The IRS rules limit how much tax-free money you can squirrel away in both HSAs and FSAs. For an FSA, you’re allowed to contribute up to $2,650 in 2018. However, your employer can place stricter limitations on your FSA contributions if it chooses.

How much you can contribute to an HSA changes each year and depends on whether you have family HDHP coverage or single-only HDHP coverage.

 20172018
Yearly HSA Contribution Limits
Self-only coverage under age 55$3,400$3,450
Family coverage under age 55$6,750$6,900
Self-only coverage age 55+$4,400$4,450
Family coverage age 55+$7,750$7,900

Who Is Responsible for HSA vs FSA Withdrawals

Since your employer technically owns your FSA account, the administrative burdens for this type of account fall on your employer. For example, it’s your employer’s responsibility to make sure funds withdrawn from your FSA are only spent on eligible medical expenses.

With an HSA, the buck stops with you. You’re responsible for accounting for HSA deposits and withdrawals. You must keep sufficient records to show the IRS that you spent any withdrawals on eligible medical expenses, or you’ll have to pay income taxes plus a 20 percent penalty on any withdrawn funds. Any year you make a deposit or take a withdrawal from your HSA, you’ll need to file Form 8889 with your federal income taxes.

HSA Vs FSA—Only One Can Be Used as an Emergency Fund

Since you own your HSA, you’re the one who decides when to take the money out and what to use it for. If you choose to take it out for something that’s not an eligible medical expense, you’ll pay a stiff 20 percent penalty on it. Additionally, non-medical withdrawals will be added to your income that year, so you’ll pay higher income taxes, too.

While it might not be recommended, and it might not be a savvy use of the funds in your HSA, it can be comforting to know that you have a pile of money you can access in an emergency if you must. However, you must also be willing to pay the penalties.

With an FSA, you won’t be allowed to withdraw the money for anything other than an eligible medical expense. If your house burns down and you and your toddler are faced with living on the street…tough luck. You can’t use your FSA money for housing, no matter how desperate you are. 

HSA Vs FSA—Only One Can Be Used to Help Plan for Retirement

While FSAs aren’t thought of as retirement accounts, HSAs are increasingly being used as an additional way to save for retirement. Since an FSA can either be used for eligible medical expenses or forfeited at year end, it can't help you plan for retirement (except for any money you might save and otherwise invest that's used tax-free for eligible medical reasons).

FSA vs HSA—Only One Lets You Withdraw Money You Haven’t Deposited Yet 

With an HSA, you can only withdraw money that’s actually in the account. However, with an FSA, you’re allowed to withdraw your entire yearly contribution as soon as you’ve made the first contribution of the year.

For example, let’s say you’ve committed to having $1,200 per year, that’s $100 per month, payroll deducted and deposited into your FSA. If you get sick and have to pay your entire $1,500 health insurance deductible in February, you’ll only have $100-$200 in your FSA. No problem, you can withdraw your entire yearly contribution of $1,200, even though you haven’t actually contributed it yet.

You’ll have a negative FSA balance, but your contributions will continue with each paycheck. At the end of the year, your FSA balance will be zero. What if you leave your job before the end of the year? You don’t have to pay the difference back!

HSA vs FSA at Different Stages of Life

While there are many accounting type differences between an HSA and an FSA, the choice of a plan may also come down to expected medical expenses. If you have young children and are relatively healthy, an FSA might be a good option for the type of copays and other expenses you will encounter. If you develop a major medical condition, however, and HSA that has been building may provide greater coverage in helping these greater out-of-pocket expenses.

Bottom Line on the Differences Between an HSA and FSA

While both HSAs and FSAs are touted as ways to reduce the amount of taxes you pay, there are many differences. As a quick summary, these plans differ in:

  • Who owns the account
  • Eligibility
  • What happens if you lose your job
  • Who can contribute
  • How much you can contribute
  • Who is responsible for withdrawals, and who is responsible for proving documentation that it is used for an eligible medical expense
  • If it can be used for an emergency
  • If it can be used to help plan retirement
  • If you can withdraw money you haven't deposited yet
  • Spending vs saving
  • Whether funds rollover or expire at the end of the year

Having an HSA or FSA is one way to reduce the taxable income you spend on medical expenses. While helpful, the amount that you can contribute may well be far below your out-of-pocket expenses if you have a major medical condition. You may still be able to use tax-free dollars for these expenses if the amount not covered by your FSA or HSA exceeds 10 percent of your adjusted gross income. Learn more about deducting medical expenses on your taxes

Source:

Internal Revenue Service. Topic Number: 502—Medical and Dental Expenses. https://www.irs.gov/taxtopics/tc502