What is HSA and FSA?
The terms HSA and FSA sound very similar and they are. Both are related to healthcare spending. Both are personally directed. Both even end in the letters “SA”. However, there are very different approaches to healthcare spending and understanding the difference is important. In this article, we will cover important differences between HSA and FSA medical plans.
FSA (Flexible Spending Account)
A flexible spending account is a healthcare-related savings account with tax benefits. This can be self-funded or funded by an employer on behalf of an employee. Funds are contributed into this account on a pre-tax basis. Distributions from this account must be used to reimburse employees for qualified medical or dental expenses.
With some FSA plans, individuals can spend the annual amount in the FSA in advance, similar to how a line of credit works.
Money set aside in an FSA medical plan generally must be used by year end. Some plans allow grace periods or roll over amounts, but in most cases, funds not used within those guidelines will be lost at the end of the period.
Additionally, FSA accounts cannot be moved with an employee who changed employment. These accounts are linked to employer-provided healthcare plans.
HSA (Health Savings Account)
A health savings account is a tax-advantaged healthcare-related savings account that must be tied to a high-deductible health plan (“HDHP”). Contribution to this plan can be made by employers or employees. Funds from an HSA account can be used to pay for qualified medical expenses that are not covered by HDHPs. Contributions can be used to cover medical, dental, vision or prescriptions.
While there is a limit to the amount contributed annually into an HSA medical plan, the funds are never lost or expire. Individuals can use these funds to invest in stocks or securities to generate returns while they hold on to the funds.
Unlike FSAs, HSA holders cannot spend more than what is available in their account but they can hold on to receipts for future reimbursement as funds are deducted.
What is the difference between HSA and FSA?
To explain this easily and also to assist in visualizing the differences, please see our table below:
|An HSA medical plan can be setup independently or by your employer. A high-deductible health plan is usually required. The owner cannot be eligible for Medicare.
|A requirement is that your employer sets up the plan for you.
|Your HSA account is managed and owned by you. it is also known as a portable account which means that if you change jobs, you get to keep your HSA funds.
|Your FSA account is managed and owned by your employer.
|Using 2022 as an example, you could contribute up to $3,650* for a self-only plan or up to $7,300* for family coverage. Limits include both employee and employer contributions. Anyone at the age of 50 or older can contribute up to an additional $1,000*.
|In 2022, you could contribute up to $2,850* to a health care FSA for an individual or $5,700* per household.
|Contribution amounts can be changed at any time as long as you don't go over contribution limits.
|Contributions can be changed if your family situation changes or if you change either your medical plan or employer.
|There's no time limit placed on the account holder when using HSA funds. Unused funds rollover to the following year. HSA funds can rollover from one provider to another every 12 months.
|Most FSAs need to be used within the year otherwise they fall away, unless your employer has elected a rollover or an extended grace period on your behalf. The IRS limits this rollover to be up to $570* per year. A possible extension could allow you to use your funds up to an additional 2 months after the end of the year but this depends entirely on your FSA plan.
|Key Tax Benefits
Contributions are tax-free or tax-deductible. Distributions made for qualified medical expenses aren’t subject to taxes.
However, if your HSA distribution isn’t used for qualified medical expenses, a 20% tax could be implemented.
|Contributions made to an FSA are tax-free and are not subject to payroll or income taxes.
Any distributions made for qualified medical expenses will not be subject to taxes.
* Please Note: The values presented in this article are to be used as examples and are subject to change.
Coverage of DME / CPAP equipment
Many people ask are CPAP supplies FSA or HSA eligible?
In general, Medical Equipment such as CPAP machines, masks, supplies and other prescribed DME are qualified medical expenses for both FSA and HSA funds. Just use your HSA/FSA card when you check out.
In conclusion: Which medical plan should I choose?
Both FSA and HSA plan options can help you save a lot of money on qualified medical expenses. In the long run, you need to determine your current situation and choose the correct plan that suits your lifestyle.
A few questions to ask yourself would be:
- Does my company or employer offer a FSA or HSA medical plan?
- How much do I plan to spend on qualified medical expenses this year?
- Would I like a medical plan that is separated from my employer and outside of work life?
- Does my insurance plan allow and qualify me to set up an HSA medical plan?
- Over time, would I like to invest my funds to allow my money to grow?
In conclusion, FSA plans tend to be less flexible than HSAs.
With an FSA plan , you may lose your money if you don’t use it up within a certain time period. Another factor to consider would be that these types of accounts are established through an employer. Should you wish to move from your employer at a later stage, this account is non-transferable. Because contributions are made on a pre-tax basis, a FSA plan helps to reduce your taxable income as well as your payroll taxes.
An HSA plan has an advantage in funds rolling over from year to year. With leftover funds, you can invest this money and it grows tax-free. You will also not lose your account should you change employment. Another consideration here is if you have a high deductible medical plan through your employer, an HSA can be beneficial to help pay for your medical expenses.
Both HSA and FSA have their shares of strengths and weaknesses but you must consider your current situation and medical requirements.