Healthcare Savings Accounts (HSAs) and Flexible Savings Accounts (FSAs) are two distinct account types you can use to set aside tax-free money for healthcare expenses. Either option can save you money and allow you to pay for things like:

• Medical bills
• Copayments or coinsurance costs
• Glasses or contact lenses
• Vision care appointments
• Dental care
• First-aid supplies
• Over-the-counter medications
• Menstrual care
• Smoking cessation products
• Pregnancy tests

FSAs and HSAs have multiple similarities, and it’s easy to confuse these two popular options for medical expenses. However, differences between them are important, and understanding what makes an FSA different from an HSA can help you decide which account is best for you and any eligible medical expenses.

Some of the key differences between these two tax-free options include the type of insurance plan you can have with them, your employer’s relationship to the account, and how long the money can stay in your account. You can read on for more details about each type.

There are several key features of an HSA you should be aware of. These include:

• You need to have a high-deductible health plan for eligibility — A high-deductible health plan (hdhp) is a health insurance plan with a deductible that is more than $1,400 for an individual plan or $2,800 for a family plan.
• The money in your HSA account always rolls over — Any HSA contribution you make to an HSA account will remain in your account unless you spend it. Funds carryover over, so you don’t need to worry about using the money up by the end of the year.
• Some HSAs are investment accounts— Some HSA accounts are investment vehicles. You can invest the funds in your HSAs to make savings grow. Other HSAs allow you to earn interest on your savings for further account growth.
• You can only spend the money you have already saved — You can’t borrow against planned future contributions to your HSA account.
• There are annual contribution limits — Your contribution amount can be up to $3,650 a year for an individual plan or $7,300 for a family plan. This includes any contributions your employer makes. People over 55 can contribute an additional $1,000 each plan year.
• Your HSA isn’t tied to your employer — You can start an HSA with a health insurance plan that your employer offers during open enrollment, but your HSA won’t be connected to your job. Your HSA account is yours, and it can roll over unused funds when you leave your employment.

Flexible Savings Account

An FSA (sometimes also referred to as an Flexible Spending Account) has several unique features that aren’t found in an HSA. These include:

• An FSA can be used like a line of credit — You can borrow against an FSA. You’ll be able to set up payroll deductions for your FSA contributions. Afterwards, money withdrawals are possible if you need funds for qualified medical expenses.
• Your FSA is tied to your employer — An FSA is linked to your employer-offered insurance plan and your employer. You won’t be able to keep your account if you leave your job.
• FSA rollover is often limited — In many cases, you’ll have a limited time to spend your FSA funds. The exact time frame depends on how your employer has set up the plan, but many FSAs have a window of 12 to 18 months. Any money that isn’t spent in this time will be forfeited.

The account plan for you depends on your situation, budget, and healthcare needs. Both HSAs and FSAs have benefits and drawbacks.

An HSA might be the right choice for you if:

• You are considering changing jobs or moving every few years. HSAs are owned by you and not an employer. So if you want an account that will stay with you, consider an HSA.
• You’re young without many healthcare expenses. You’ll need a high-deductible plan to use an HSA. These plans aren’t a great fit for people with multiple healthcare expenses, but they can work well for people who don’t have many medical expenses.
• You want to build up medical savings. HSAs can help you save money for future healthcare expenses.

An FSA might be the right choice for you if:

• You or members of your family see the doctor regularly. You might need a lower deductible plan if your family sees a doctor regularly. In this case, an FSA is probably a better choice.
• You spend a lot of money on over-the-counter medications, glasses, or other healthcare items. If you buy these items frequently, an FSA could save you significant money.
• Your employer offers dependent care FSAs. Some FSAs cover child and dependent adult care costs. If your employer offers this benefit, you’ll be able to use pre-tax dollars to pay for daycare, babysitting, home health care, and other services while you work.

Resources:

Health Savings Accounts and Other Tax-Favored Health Plans. (2020).

https://www.irs.gov/publications/p969

High Deductible Health Plan (n.d.).

https://www.healthcare.gov/glossary/high-deductible-health-plan/

Using a Flexible Spending Account. (n.d.).

https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/