HSA vs FSA—What’s the Difference?

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Before you can choose which is a better fit for you, you have to understand the difference between an FSA and an HSA. 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 similarity stops there. Here's the difference between an HSA and an FSA.

HSAs & FSAs Differ on Who Owns the Account

When you start a Flexible Spending Account, 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.

When you open a Health Savings Account, 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. 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 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. Learn more in “What Happens to My Flexible Spending Account When I Lose My Job?

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 into 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

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 $2,500 each year. 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.

 20142015
Yearly HSA Contribution Limits
Self-only coverage under age 55$3,300$3,350
Family coverage under age 55$6,550$6,650
Self-only coverage age 55+$4,300$4,350
Family coverage age 55+$7,550$7,650

Who’s 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 to 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% 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% 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. You won’t be allowed to access FSA funds for that.

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. Learn more about this in “Why Fund an HSA Instead of an IRA or 401k?

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!

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